Debts which can wait

Not all debts are equally as urgent. In deciding which debts can not wait you would need to consider the cost of delaying repayment and the impact on your ability to borrow elsewhere. So while credit card debt tends to hold the number one priority in the urgency of repayment, followed closely by other loans such as your car loan, personal loan and your home mortgage – other debts can wait and in fact can be paid off over  very long period of time with minimal adverse impact on the borrower.

HECS Debt

Hecs debt is the debt students take on to cover the cost of their tertiary education. The borrower will be required to start paying the debt off once they reach  certain level of income (just over $50,000 in todays terms). However the repayments will be kept at a fairly low level and are currently only attracting an annual interest rate of around 2%. Therefore  Hecs is mong the cheapest forms of debt available to Australians today and there is very little incentive for a student to repay this debt upfont. Same money invested anywhere else for the duration of the course is likely to yield a better return than the cost of interest on this debt.

Investment Mortgage

Most investors would have heared the advice that while you should try to repay your own home loan ASAP, you can keep the investment mortgage hanging around for as long as possible. This remains true while the system of negative gearing is in place.

Australian real estate appreciates over time. Some may argue that property doubles every 10 years. Howevr this is an arbitrary figure only. In some cases it could double in 3 years and in others over a 20 year period. Nonetheless as long as the borrower is able to generate an income and write off on their tax any income losses generated by the investment – there is no urgency to repay this debt. In fact the more investment debt you hold (if invested correctly) the better are your chances to accumulate debt using “other peoples money”, meaning the bank.

Other tax deductable debt

This covers such debts as business loans, equipment loans, business car loans – in fact any debt taken out to help the borrower generate an income. While it is important to stay on top of this debt, meaning never fall behind in repayments if you can help it – there is little point to pay off these loans sooner than required unless you come into a large amount of money. After all the cost of this debt is subsidised by the government through tax concessions.

When it comes to debt repayment, the borrower needs to repay non tax deductible debt first and ASAP. Once this is done, business debt needs to be serviced on time but need not be repaid early, unless you can comfortably do so.

 


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