Did you know that getting into debt can help you to grow your wealth faster? It can if you take on ‘good debt’, rather than ‘bad debt’. It’s important to understand the difference between the two.
What is good debt?
Good debt is money you borrow to invest in assets that increase in value and/or or earn you income. Buying property is an example of good debt. Australian property prices have a long-term growth record.
If you borrow to buy property and you hang onto it for the medium to long term (5 to 7 years), history shows that it will increase significantly in value. The difference between its value and what you owe on your loan gets wider over time.
There are two basic types of properties you can buy:
- a home to live in
- an investment property to rent out to tenants.
Both types of properties can help you to build your wealth as they increase in value. An investment property can also earn your rental income and give you tax benefits.
What is bad debt?
Bad debt is the opposite to good debt. It involves borrowing to buy assets that will decrease in value, or borrowing to pay for expenses. Examples of bad debt include:
- car loans. Cars decrease in value almost as soon as you buy them.
- using a personal loan for an expense like a holiday. If you do, you’ll still be paying interest on the money you borrowed long after your holiday is finished.
- using your credit card for everyday expenses like groceries and paying interest. Credit cards are one of the most expensive forms of finance.
Positive versus negative gearing
Borrowing to invest and grow your wealth is known as gearing. There are two basic types of gearing – positive and negative.
Positive gearing is the situation where the income from your investment (e.g. tenant income on an investment property) is higher than the costs (e.g. loan interest and fees).
Negative gearing is where the investment’s costs are higher than its income. This loss can be more than offset by the growth in the property’s value over time and/or tax benefits. In addition to loan interest, common investment property expenses that you can claim as tax deductions include:
- council rates
- property management costs (if you hire a property manager to manage tenants)
- repairs and maintenance expenses
- strata/owners’ corporation fees (if you buy a unit/apartment or townhouse)
If you’re thinking about buying property, use our borrowing power calculator to get an estimate of how much you could borrow. It could be much more affordable than you think.
Our experienced and licensed brokers at Wisebuy Investment Group’s mortgage brokers in Newcastle can help you to find the right home or investment property loan for your needs. We can also help you with your loan application. We service a diverse range of clients in Newcastle, Lake Macquarie and Maitland.
Contact us today for an obligation-free chat!