Your mortgage is a liability against you not your house

-


A pivotal point in my financial understanding was the moment I found TerryW. He freely shared over 100 tax tips, and the concept of structuring.

I now view debt differently. I see it as a as a single bubble. Collectively I have to repay it all. Collectively I have a limit the banks will lend me. Collectively I have a personal ceiling I should not exceed.

The security of the debt doesn't change this. The tax purpose of the debt doesn't change this. 

It's also important to see that debt doesn't change the returns of any asset you buy with it. Buying shares with debt or cash doesn't change how much they grow or not.

Example 1: Investment Property

Imagine you have a $1M PPOR paid off, and want to buy a $500K IP. 
  1. Borrow $500K from PPOR, buy IP no debt against IP
  2. Borrow $500K against IP, secure against PPOR to avoid deposit.
In both cases we have the same amount of debt. The difference is which property the debt is secured against. Tax wise if done correctly there is no difference.

The point of the example is some might find option (2) more appealing because their home is still debt free. 

However really both options are the same amount of debt, and really should be viewed as the same.

Example 2: Shares

Imagine someone has $1M of debt and $1M cash.

They want to buy $1M in shares and $1M home.

  1. $1M debt buys home. $1M cash buys shares. 
  2. $1M debt buys shares. $1M cash buys home. 
Does one option feel safer than the other?

If you feel that 1 is safer than 2 then you are old me, and you have some thinking to do. 

The only difference between the two is tax, option 2 is more tax efficient so for some it's better to structure your debt this way.

Summary

So when thinking about debt think of it collectively and think of it as structuring. Ideally structure your debt to be tax efficient, and don't exceed your personal debt ceiling.

Related

  • Cash on cash return
  • Investing with debt vs investing while in debt

Comments

Post a Comment

Popular posts from this blog

DIV 293 Tax

-
I'm considering the impact of DIV 293 on my possible IP sale, so lets see what its all about. DIV 293 tax is a fun one as it works on the lessor of two amounts. Thus some funky things occur. Now lets put aside the very good point that focusing on reducing tax is a terrible strategy, and focus on reducing tax. Formula If  DIV 293 Income > $250K  then DIV 293 applies. If  Super < Income + Super - $250K  then  Super Assessed  Else  Income + Super Assessed Note:  Income  on this page means all DIV 293 Income excluding Super. Hold My Triple Venti Half-Caf Soy Latte Wait a second, I see something... = Super > DIV293 Income + Super - $250K = Super - Super > DIV293 Income + Super - $250K - Super  (Subtract Super both sides) = 0 > Income - $250K  (Eliminate) = Income - $250K < 0  (Reverse) = Income - $250K + $250K < 0 + $250K  (Add $250K both sides) = Income < $250K Oh, I did not expect to simplify what it t...
Read more

Finance Battle: HISA vs FHSSS

-
Image
In this lineup let's see the difference in FHSSS and HISA. FHSSS $10K put into FHSS ends up as $8,500. Lets assume 4% deeming rate, so you can withdraw =$8,500 x 104% = $8,840. Now you withdraw with MTR 32%: = 8,840 x (100% - 32% + 30%) = $8,663.2 MTR 39%: = 8,840 x (100% - 39% + 30%) = $8,044.4 MTR 47%: = 8,840 x (100% - 47% + 30%) = $7,337.2 HISA $10K income into HISA. Lets assume 5.5% return. MTR 32%: = 10,000 x (100 - 32%) x (100% + 5.5% x (100% - 32%)) = $7,054 MTR 39%: = 10,000 x (100 - 39%) x (100% + 5.5% x (100% - 39%)) = $6,304 MTR 47%: = 10,000 x (100 - 47%) x (100% + 5.5% x (100% - 47%)) = $5,454 FHSS Relative Improvement Relative to HISA So how much better if FHSS after just 1 year? MTR 32%: = (8,663.2 - 7054) / 7054 = 22.8% MTR 39%: = (8,044.4 - 6304) / 6304 = 27.6% MTR 47%: = (7,337.2 - 5454) / 5454 = 34.5% ANZ FHSS Calculator This calculator compares over 4-7 years which is an improvement over my above calculation. I believe it also includes the impact of the withdr...
Read more

Debt Recycling and the Offset Fallacy

-
Image
A common miss-conception that caught me out for longer than I want to admit is the difference in 'making money' and 'no longer spending money'. When you use your offset you are 'no longer spending money', however I mistakenly thought of it as 'making money'. This meant I often miss-calculated investing while I have a mortgage. Credit Card Think of your credit card. If you spend $1,000 you start paying interest. If you repay the $1,000 you stop paying interest. Now the question, are you saving 20% pa x $1,000 forever by paying off the credit card? How do we account for the interest we no longer pay because we paid the credit card off?  I ignore it, and this applies to my offset too. The Offset Fallacy The example that made me see offsets differently was to imagine my current situation, lets say I've got a $200K mortgage with $100K in the offset. Now imagine you are debt free, and go and borrow $200K, park $100K in the offset and spend $100K on a nice ...
Read more