Financial planning is really about… consolidating private debts onto a home loan

The idea of debt consolidation is a piece of ‘low-hanging fruit’ for most advisers. Debt consolidation refers to the combining oe one or more expensive debts into a single debt facility to which a lower interest rate applies. Usually, the new loan is secured in some way and it is this security that allows for a lowered rate of interest to apply. A common example is where a client has equity in a home and is paying higher interest rates on personal debts, such as a personal loan that may have been taken out to pay for a holiday. That client will usually do well to take out a loan secured against the home and use the money drawn on that new loan to pay out the other debts. Doing so will gain the clients an immediate benefit in terms of reduced interest payments, and this change alone can often lead to annual savings that more than pay the client’s fee to you as their adviser. This can be a great start to the advice process: the simple move of consolidating debts puts the client ‘in front” even before other elements of their financial plan are addressed.

Advisers do not need a credit licence to simply point out that a lower interest expense can be attained through debt consolidation, and to then recommend that the client talk to their lender about giving effect to such a change.

The AMP give a simple example of a common presentation where 19% of the interest expense that clients faced each month derived from just 7% of their debts – the expensive credit card and personal loan debts. Consolidating these debts reduces the overall interest bill by 13%. 

Credit Licencing: Where an adviser simply points out the benefits of debt consolidation and leaves the client to organise the loan which will be used for the consolidation, the adviser will not breach the credit licencing rules. You can read more about these rules here

Practice Tip – How to Communicate this to Your Client

The following paragraphs can be used to suggest debt consolidation with your client:

You currently have a reasonably large level of private debt that is either unsecured or secured in such a way that the interest rate being paid is higher than it needs to be. We recommend that you meet with your bank manager to discuss consolidating these loans and credit cards onto your home loan. While this will obviously cause an increase in the size of your home loan, because the other loans are being paid out the overall level of debt will not change. What will change is the total interest that you pay on this debt; the home loan will give rise to a much lower interest expense each year.

(You may wish to quantify the saving for your client here).

Obviously, this consolidation of your debts is not something that you will be able to repeat too often – the time will come when you have exhausted your ability to borrow any further. So, once the consolidation has been completed we recommend that you avoid taking on any more credit card or personal debt.

The Dover Group