The challenge of good debt versus bad

There may come a time that you as a homeowner, need to decide whether to pay off your current loan or invest in another property.

When you are a few years into your home loan your circumstances will have changed since you first acquired your home and it’s likely you’re earning more money and possibly have some extra funds in the bank.

At this stage you will want to make some good decisions about how to make further progress with your investments.

However, it is important to sort out any accumulated or bad debt first.

Bad Debt

Bad debt is any debt that affects your cash-flow and is detrimental to your future investments and wealth creation goals.

The least efficient debt is money borrowed through credit cards and personal loans to pay for day-to-day expenses or an asset that decreases in value, like a car.

Good Debt

Good debt is the kind that helps you purchase wealth-building assets, where the costs incurred are tax-deductible.

Assets like an investment property, that grow in value and generate income, which financially benefits you and stops you from incurring the debt.

Good debt should mean your overall financial position is better as you can leverage the asset purchased.

It’s important that you don’t get good debt and bad debt confused – particularly if you’re looking at paying off your home loan or investing.

Understanding the difference between good and bad debt is key to making good investment decisions.

Get asset wise

Working towards managing your assets and other investments while paying off your home loan will offer a number of short and long-term benefits.

The aim is to get yourself in to a better position in order to divert more cash-flow to your bad debt, by paying down loans and if possible, make extra contributions to your super fund.

This will help you to bring down the overall interest and cut the lifetime of your loan and ensure you have a secure financial future.

How good does that sound?

How to leverage the equity in your home

As discussed already, investing is an example of good debt as you’re using funds to purchase a wealth-building asset.

So, the next move is to leverage the equity in your home and to expand your assets.

Your home equity is the amount of money you own on your home, calculated by subtracting the loan amount from the property's market value.

Accessing the equity in your loan is easy

With a simple mortgage refinance, you can take steps towards buying a second home. The equity can be used as a deposit on a second property, while your current home becomes a security on the new debt. When the value of your home rises, the equity does too.

It is important to remember that owning a second property which you rent out does not guarantee the investment will make a positive contribution towards your wealth creation plan.

A good understanding of the type of property and investment strategy that can deliver the financial benefits is required first in order to make financial progress and comfortably own future investment properties.

At Call2View, we can assist you to find properties that fit well with your investment strategy and deliver the financial benefits that you require to succeed.

Our agents will help you find exactly what you’re looking for by providing you with up-to-the-minute listings and in-depth property reviews.

Contact us today!

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