What is Good Debt and What is Bad debt?
Let me start with Bad debt, this is debt that is usually personal debt under your own name for example a mortgage on your own home, a personal loan, credit card or car loans. The reason this is called Bad debt, is that you are borrowing money in your own name for a debt that is not going to bring in any investment return. Therefore, the interest on the loan is not tax deductible.
So now you know what Bad Debt is, what is Good Debt?
Good Debt is where you are requiring finance to invest, where you will receive a return on your investment. So the examples of this is if you are borrowing to purchase an investment property, buying shares, or another investment that is going to give you a return on your money. It is where the Australian Tax Office (ATO), makes a ruling on the type of lending that you are entitled to receive a tax deduction against the income you received from the investment.
When you go to a bank to purchase an investment property the bank may lend you 80% or 90% of the value of the property – this is called leverage. It is called leverage because you are using someone else’s money (the bank) to purchase the property to become wealthier, this loan would be a good debt loan with the help of leverage.
I cannot stress enough that having a full strategy around Good V’s Bad debt is so important – as you want to reduce the Bad debt as much as you can. You can have an advanced strategy around that and making plans to pay down the bad debt in big chunks rather than trying to pay off an owner occupied home loan over 30 years and costing you hundreds and thousands of dollars in repayments over the life of the loan.
Make sure you talk to the experts and someone that practices what they preach, as there are lot of players in the industry that are not actually putting their foot in the game but advising people on what to do without any actual experience.
Come and have a chat with us about your good and bad debts – we have experience in both – let Blue Wave Property Strategies, help you ride the wave to wealth.