Australians appear to have a real love/hate relationship with debt. Everyone seems to agree that debt is terrible…until we’re offered a new credit card with “6-months interest-free”. But is all debt bad debt? How do you tell the difference between good debt and bad debt? Is there a way that you can use your debt to build wealth? And how can a Gold Coast finance broker help you obtain an investment property loan?
Is All Debt Bad?
It might sound crazy, but not all debt is necessarily bad. Now, not being able to repay your debt – that’s bad. Taking on more debt than you can handle can lead to a bad credit rating, a lot of unnecessary stress and possibly even losing your home. But manageable debt that is helping you work towards a goal…that can be a good thing.
So, what are the different kinds of debt? They can basically be listed in three distinct categories:
- Debt that is necessary: Your home loan is a form of necessary debt. It’s not tax-deductible, but in the long run, it will result in you owning your own home (an asset that should increase in value over time).
- Debt that is bad: Credit card debt is a classic example of bad debt. You’re paying interest on items that will most likely lose value, possibly even by the time you’ve paid off the debt. So, you’re servicing debt, but you have nothing to show for it at the end.
- Debt that is good: Good debt is the kind that can help you achieve your financial goals and build wealth (like a loan for an investment property). It’s tax-deductible (so it’s beneficial now) and it’s paying off an asset that is increasing in value.
How Can You Use Your Property Debt to Build Wealth?
Now that we know the difference between good debt and bad debt, how can you use your property debt to build wealth? According to Michael Yardney (a multi-award-winning property investment advisor), this can be achieved through a concept known as “debt recycling”. In a recent article he described this process as “taking on good debt and borrowing at historically low-interest rates and using leverage to grow your assets, while at the same time receiving rent that is likely to cover your interest payments.” Mr. Yardney refers to this debt recycling tactic as “a sound investment strategy.”
Understanding Debt Recycling Investment Property
Debt Recycling Investment Property involves taking necessary debt (your existing mortgage) and then using it to create good debt. Basically, the process works like this:
1. You use the equity in your existing home as a deposit for an investment property loan.
2. You buy an investment property.
3. This investment property delivers immediate income (in the form of rental returns), which can then be used to service the loan repayments.
4. You continue to pay off your investment property loan while also paying down your home loan. Both properties experience long-term capital growth, increasing the total value of your assets.
5. By the time you’re ready to retire, you’ve paid off both loans, leaving you with a home you can live in and an investment property that will provide a steady income stream throughout your retirement.
How a Gold Coast Finance Broker Can Help You Obtain an Investment Property Loan
Of course, any kind of significant financial investment should only be made after seriously considering your personal financial situation. But if you’re interested in obtaining an investment property loan and you’re not quite sure where to begin, start by giving me a call on Ph: 0421 934 033 or Ph: 07 5597 6049. As an experienced Gold Coast finance broker, I can answer your questions and explain the various pros and cons of using equity to obtain an investment property loan.
The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances.
Before taking any action, consider your own particular circumstances and seek professional advice.