Good Debt VS Bad Debt

Have you ever thought about debt being good or bad? Has it ever crossed your mind to ask if there was a difference? Well, there is and it’s a fairly significant one, let’s take a look at why.

Your home mortgage is bad debt because you can’t claim any of the interest. Whereas debt used for investment purposes is good because you can claim the interest. But you’re probably thinking it’s all debt at the end of the day, isn’t it? The differentiator is the purpose of the debt. 

Let’s look at another example to illustrate the same point around the purpose. Let’s say you won the lottery and decide, to hell with it, and buy a brand-new yacht for $200,000. If you go out regularly on the yacht with your friends and family then all the costs are considered personal or domestic, and you get no tax deductions. But if you set up a charter business and rent the same yacht out for day trips, then it becomes a business expense, and any costs incurred are deductible to your charter business (you would also be able to deduct the wear and tear of the yacht as depreciation, but that’s a different conversation).      

Each investment for rental property is like a small business. It has a profit and loss statement, an asset value, and usually a liability in the form of a mortgage. The intended purpose of the investment property is to generate the best rental returns Australia and capital growth, meaning you qualify for tax benefits.

It’s so important to get rid of bad debt and get more good debt. If you are borrowing at 5% for personal purposes, there is no tax benefit, and your cost is 5% pa. Whereas a mortgage on an investment property might be 5% pa but because the interest is tax deductible it reduces your effective interest rate (interest rate minus the tax benefit). Depending on your income tax bracket this could result in saving a small fortune over a twenty-year period.   

The secret we have seen our many successful clients do time and time again is to extract available equity out of the value of your home and then use that lazy equity as a deposit for an investment property. Let’s say a client refinances $200,000 from their owner-occupied home to go in as a deposit and closing costs on smart investment property purchase. The purpose is for investment, and the interest is therefore deductible.

If you have lazy equity in your home, then reach out to your dedicated property consultant to have a chat. Why wouldn’t you employ that equity to work hard for you, so you don’t have to?

Whether you are just getting started in property, looking to reduce your mortgage, or looking to maximise income for retirement, we can help craft a property Strategy that will suit your number and lifestyle goals. Reach out to our team today to get started on your property investment journey.