Making the Most of Debt; It’s Not All Bad

DebtThe experiences learned from the global recession will be that many people will believe that any form of debt is bad for you. One of the difficulties is realising that some debt can be good for you is to balance your financial outlook as it’s easier if you understand the difference between good and bad debt.

When you discuss your property home loans, whether it’s for your own personal use or as an investment property to rent out, your mortgage broker in Rockingham will be pleased to explain the difference between good and bad debt.

Unless you are unbelievably rich, and that counts most of us, you will have to enter into debt if you want to own a property and perhaps purchase a new vehicle from the dealer’s showroom. Most people don’t build up enough savings to buy their property or their vehicle with cash. The natural reaction to all debt is that it is bad and is something you should never take on or get rid off as soon as you can.

The difficult financial years have shown that many people have too much debt and as soon as they’ve taken a hit on their income, they cannot make the repayments on their debt and risk the chance of losing their home and their vehicle.

Nevertheless, some of Australia’s most prolific investors in property have made the most of good debt for years.

How Debt Can Be Good for You

The best way to use debt is for it to work for you more than it costs you to keep it.

Sometimes property values have increased rapidly over a short period, but in recent times everyone has seen property values decreasing at a rate they may never have seen before. Nevertheless, residential property has a history of doubling, approximately, its valuation, roughly every 10 years. Here is a simple example; by borrowing $200,000 against a property worth $300,000, in 10 years time you will owe a lot less than the $200,000, and your property will be worth over $600,000.

Your equity will stand at least $400,000 to the better, without accounting for the part of the loan you have paid off, but you will need to deduct those payments you will be making each month for those 10 years to see the real profit you have gained.

By expanding your equity levels, you might be able to borrow further funds to increase the size of your portfolio by purchasing more property. For the purposes of the example, with a $100,000 deposit, you can increase the value of your asset, achieve great cash flow and you’ve got a vast capital gain.

Making the Most of the Tax Breaks

For high income earners, you can talk to your accountant about making the most of any tax advantages in negatively gearing your investment, especially where interest on the loan is higher than the income you receive for the rental of a property.

You will have to understand that you need to make great choices and receive first-class financial advice from your mortgage brokers in Baldivis to be able to work with good debt and avoid bad debt, which is money that no one can afford to carry.

An easy example of bad debt is the purchase of a new vehicle that loses a considerable amount of value from the moment you purchase it, to the time that you get it home to your driveway. Money spent on the majority of new vehicles won’t return a good investment for you, so perhaps you have to accept that there are some bad debts in life, but the majority of good debts are related to the purchase of property.