Last blog was all about debt with no good outcomes attached to it – aka bad debt. This post though, we’ll look at debt that’s either okay (the first of which is likely to surprise you) or debt that could actually be considered to be ‘good’ debt.
Home loans for owner-occupiers
Surprised? Most people think of their home as their most important asset, especially with real estate price growth as it currently has been. However, home mortgages are classified as okay debt, because although the debt is reasonably cheap (especially with record-low mortgage rates – currently 2-3%) and it buys you an asset that is likely to appreciate over time, it’s not a true asset because;
- it doesn’t make you money year on year (i.e. it’s not a productive asset)
- you will always need somewhere to live and you can’t realise your asset’s value until you sell it. Certainly, you can downsize and realise some cash, but there’s only so many times you can do that and still have a comfortable life.
- Property is not a particularly liquid asset
And let’s not forget, many of us have seen home loan rates go as high as 18-20% in the early 1990’s recession (yes, really). It’s not likely to go that high again without some serious government intervention, but it’s always a possibility.
HECS or HELP debt, as it’s now known, is a government-sponsored and supported way for students to improve their chances of employment. In essence, the government see it as encouraging you to become a better future tax-paying member of society, with the intention that as one advances in their career, they’ll earn more and therefore pay more tax.
Student debt (obtained via the government) is interest-free and only requires paying back when the government deems you to earn salary high enough ($47,014 in FY21-22) to make repayments supposedly not too painful.
And whilst it’s debt to fund an investment in future earnings, it’s still a debt that can hold you back and there’s a largely ignored catch.
Whilst it is true student debt is interest-free, it’s also indexed in line with inflation each year. So if inflation goes up (which is likely in the short to medium term), your unpaid debt will grow in line with that. For example, if you had $10,000 outstanding on June 1, your debt would grow by CPI (as measured in March each year) which was 0.6% – so only $60. But if you’ve still got debt after 5-10 years of 3-5% CPI, the effects of compound interest will kick in. That having been said, it’s still incredibly cheap financing of your future.
The other thing to keep in mind is that this debt still counts against you when looking to build your asset base in terms of buying a home and will reduce your available take-home money to put towards a mortgage (or any other asset you’re looking to purchase).
Investment loans for property or shares and business loans
They are not only likely to be productive in terms of growing your asset base – through long-term capital gain, shorter-term income received or goodwill to be realised on sale.
Certainly, these loans are a little more expensive (3-5%) in recognition of the funds being at higher risk of non-repayment or loss to the bank than say a regular owner-occupied home loan. However, the upside is that generally, the interest on these loans is tax-deductible against either your personal earnings or your business’ earnings.
Although it’s important to note that ploughing more (borrowed) money into a business venture, investment property or share portfolio that’s already struggling to stay afloat or produce income is likely to cause its investor more stress. And that’s where seeking the advice of a qualified professional can make a huge difference.
And that’s where we can help. If you’d like to talk to someone about your business plans and what might be the most appropriate next move for you and it, we’d be delighted to talk. You can call us on 02 6023 1700 or drop us a note via the form below.