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Debt free and happy

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It is true money might not always buy happiness, although it certainly helps, but there’s no doubt that living with ‘bad’ debt is enough to wipe the smile off the face of working Australians – and new research has now proved this.

The latest AMP.NATSEM Income and Wealth Report, The Pursuit of Happiness, shows that realising the great Australian dream of home ownership has led to much higher satisfaction levels among Australians.

Not surprisingly, people who own their home debt-free reported the highest levels of life satisfaction, followed by home owners with a mortgage and finally non-home owners.

The report, which examines satisfaction levels of Australians, has revealed that the family home is the biggest source of wealth most people will ever own, with 69 per cent of households owning their home (with or without a mortgage). The average value of the family home is $412,000, with mortgages over the family home averaging $142,000.

With interest rates on the rise, it is likely that home owners without a large mortgage hanging over their head will sleep easier at night. While the report reveals that spending money wisely and investing in a home increases happiness levels among people, there is no doubt that in a rising interest rate climate, those with a big mortgage are likely to not only be feeling the pinch, but also higher levels of dissatisfaction with their lives. There are ways, however, that these people can reduce their mortgage at a faster rate.

Making larger or more regular payments off their home loan is simply the best way for home owners to rid themselves of their mortgage sooner. To do this, people need to have a disciplined approach to budgeting and reducing day-to-day spending. Making extra loan repayments helps most in the first few years of a mortgage, but will certainly help pay off the loan much sooner if made at any time home owners can afford it.

If people make larger repayments whenever they can afford to, they will not only be able to pay off their mortgage faster, and with less interest, they will also build up a surplus that can be used in times of need.

Finding the extra money needed to pay off the mortgage faster can usually be achieved by making a few simple lifestyle changes. Putting together a budget and tracking spending is the first step towards implementing a regular savings plan. Even simple steps such as consolidating credit cards will go a long way to helping people better manage their debt and kick start their saving.

It is also important to shop around for the best possible interest rate, which is usually the biggest cost associated with a mortgage. Anyone thinking of refinancing should first make sure they will be better off financially, and if they want additional features attached to their home loan, look for a low interest rate loan with these extras. Paying off a mortgage weekly, instead of monthly, can also save people thousands of dollars.

Home owners with a reasonable level of equity in their home may want to consider a strategy of debt recycling. This allows people to unlock equity in their home and help them build long-term wealth, whilst reducing their debt at the same time.

The idea is that once a property has built equity it can be used as a security to take out a separate loan to help people establish an investment portfolio. The income and tax savings received from the investments (as well as surplus cash flow) is then injected back into the home loan, reducing the outstanding home loan balance.

To find out more about how to pay off a home sooner and enjoy a happy future without debt, people can seek the advice of a qualified financial planner.

What you need to know
Information current as at September 2010.  This article contains general information only. It does not take into account your objectives, financial situation or needs. Please consider the appropriateness of the information in light of your personal circumstances.  If you decide to purchase or vary a financial product, your financial planner, our practice, AMP Financial Planning and other companies within the AMP Group will receive fees and other benefits, which will be a percentage of the premium you pay and/or the advice fee you agree with us.  Further details are available from your planner or AMP Financial Planning Pty Limited, telephone 1300 157 173.

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Greg Healey (ABN 40 903 379 148) trading as Explore Wealth Management is an Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited ABN 89 051 208 327 Australian Financial Services Licence 232706 and Australian Credit Licence 232706
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