| Most people have a mortgage or loan of some sort during their lifetime. Many of those people don't understand the intricacies of their loan agreements and some simple systems that help build wealth by using debt appropriately.
It is useful to think of debt in three different categories; good debt, bad debt and neutral debt.
Good debt is relatively low (or no) interest, where the money borrowed is used to generate a much higher return than the cost of borrowing. A specific strategy used in this area is something called ‘leveraging', and it is potentially more advantageous if the loan can be structured in a way that makes the interest paid a tax deductible expense.
Bad debt is high interest borrowing, especially when taking out a loan on consumer items that depreciate (lose value) over time. This type of debt becomes very costly when interest payable is considered as part of the original purchase price. Most short-term debt such as credit card balances, hire purchases, store cards and car finance fit into this category. It usually makes sense to either clear these sorts of loans as quickly as possible. Or to consolidate them into a loan on better terms and interest rates if necessary.
Neutral debt is a category where it is not clearly financially evident whether it is better to concentrate on clearing a loan or using the funds available for ‘investment' elsewhere. The classic example of this type of loan is the typical non-tax deductible home loan at moderate and affordable interest rates.
There are literally hundreds of loans to choose from; different lenders, interest rates, structures, fees and flexibility. These key factors all impact how much the loan will cost you over the long-term, and when it will ultimately be paid off. Just as most people visit many homes before deciding to buy one, it is vital to take time to be just as careful in choosing your mortgage.
Our role as Financial Planners include assessing any existing and/or proposed debt, and ensuring it is structured in the most appropriate manner. We also explore the financial options of ‘gearing' or ‘leveraging' to use debt in an investment portfolio in an effective way. This is particularly useful for clients who have or are interested in direct property investment, especially when coupled with our in-house calculators which make it relatively easy to assess the investment worth of specific property investment opportunities. As mortgage brokers with access to a panel of over 20 different lenders, we can also make arranging mortgages a less-stressful experience.
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