No time like the present to clear expensive debt

If there was ever a time to be clearing expensive debt, it is now. When inflation and interest rates are low - and likely to fall further as the January 1999 EMU deadline looms - the real cost of loans, credit card balances and the mortgage is not being undermined by inflation. Anything you pay in interest over and above the inflation rate - and nobody is paying just 3.2 per cent interest - is taking a serious chunk out of your cash flow, which is also hardly likely to be beating the inflation index. The other reason to make inroads into personal debt right now is because of the increasingly worrying signs about the world economy. In just a few short months, international financiers and economists have gone from being "concerned" to "worried" to "very worried" about the economic crisis in Japan and the developing economies of the Far East. Japan isn't just in recession anymore, they say, but perilously close to a depression.

If the Japanese economy goes into free-fall it will take not just the likes of Korea, Thailand and Malaysia with it, but perhaps some Western banks (from whom it borrowed heavily). It doesn't matter that our own banks aren't in that league; Ireland Inc won't be immune if our world trading partners go into a serious slump.

On the plus side, lower interest rates here mean that anyone with a personal loan, an overdraft or a mortgage is going to see their repayments come down. That saving, however modest or extreme, should be used to pay off loans or accounts with the highest interest charge - probably the credit card balance. (Credit card lending facilities are stubbornly immune to falls in interest rates.) It simply makes no sense to be paying 25 per cent interest when personal borrowing rates will be less than 10 per cent and inflation is under 3 per cent.

The single biggest debt most people, even high net earners have, is the mortgage. The property boom has meant that many people have over-stretched themselves in buying their home and could be in serious financial difficulty if anything happened to them or their business or even if there was a downturn in the value of property - a natural offshoot of recession. There are no signs of this yet - our housing stock was undervalued for many years - but negative equity is something that thousands of British homeowners are still coming to grips with as a result of their last property boom 10 years ago.

Accelerating a mortgage payment is a guaranteed way to reduce the risk of negative equity and to bring down expensive mortgage debt. But Mr John Gilmartin, of independent brokers Gunn Robinson O'Higgins, says: "With interest rates falling, you don't even need to pay anything extra. Just leave your payments at their present levels and you will reduce your capital and pay off the mortgage sooner".

The impact is most dramatic where the interest rate is highest. "Plenty of people are coming out of 8 and 9 per cent fixed rate contracts. If their interest rate drops to 6 per cent, someone with 15 years left on a typical £50,000 mortgage, who leaves their repayment where it is, is going to save 44 monthly payments or £22,314. Their mortgage will be paid off in just over 11 years. If your mortgage is worth £100,000, you can double that saving to over £44,000."

National Irish Bank, which was the first institution to introduce the idea of no-cost, accelerated payment mortgages, is also recommending that customers increase their payments. NIB has produced a computer demonstration of the Tailored Homeloan for anyone who drops into its branches and is inviting customers to see the reducing capital effect of increasing a mortgage payment, even by a modest monthly amount. The table above, says NIB, demonstrates the sense of such a debt management exercise.