Go forth and borrow is the word according to Joe Hockey, though as a financial adviser he should stick to his day job.
I know worrying about debt is so last year’s budget and to be fair he did say we should “borrow and invest” as distinct from borrow to buy. That’s just as well because have you seen what credit card rates have been doing?
Exactly. Nothing, in spite of numerous rate cuts by the Reserve Bank going back 3??????????????? 1/2 years. The average card charge of 17 per cent is more than eight times the official cash rate, when the norm used to be just over two times, according to www.canstar.com.au.
And wouldn’t you know, if you find a lower rate, sure as eggs, there’ll be an annual fee. Is nothing simple? The only excuse for having one of those cards would be to take advantage of a zero rate balance transfer. Even then you wouldn’t want to be adding more debt to it.
Truth is the rate doesn’t matter when you use your credit card the right way. Funnily enough, using it to the max is even better than not using it at all but it has to be one of the 55-day interest-free cards. Use it for everything and then pay it off before it’s due. That’s the best revenge on the banks I can think of, especially if you can earn a bit of interest, not that it’d be much, while your pay is parked in an account in the meantime.
Hmm, might be an idea to download an app or something so you keep track of what you’re spending.
If you have a mortgage with an offset account you’d save interest on the home loan and maybe accumulate lots of reward points, neither of which Joe had in mind. Still, he does have a point about borrowing to invest, aka gearing. I mean if you’re going to be in debt you want it to be the nicer tax deductible kind.
I’ve banged on before about the difference between debt that’s good – because the interest is tax deductible – and bad which is frittered away on things that lose value such as a car.
For argument’s sake, a mortgage is bad debt too since the interest isn’t deductible, even if home ownership boasts even better tax benefits.
It could be made partly tax deductible too but you’d have to rent out a room or two.
Or you could turn the bad into good debt.
Goodness, is that possible?
Yes, though I’m talking about recycling, not reducing, debt. Still, your tax will be lower and you’ll finish up with an asset that grows in value.
The secret is stepping up your loan repayments and then borrowing whatever the extra was to invest – probably in shares since it wouldn’t be enough for a property. It’s as good as making some of the mortgage tax deductible.
Hang on, wouldn’t that mean more money going out?
Ah, but the part going on shares becomes tax deductible, which was the whole point, and can probably be claimed during the year against your PAYG instalments by filling in a special form (NAT 2036) from the Tax Office. Plus the dividends should have a bonus 30 per cent franking credit.
I should mention it won’t be good debt for long either if you buy some speccy stock that goes belly up.
Another way of creating good debt is getting any shares you already own – say Medibank Private or Telstra – to do some heavy lifting.
Sell and buy them back in the next market correction – or choose different stocks – using a tax deductible loan. This is one occasion when the lower the price is, the better off you are because there’s less to borrow. A home equity line of credit, a margin loan or instalment warrant are all possibilities. A credit card isn’t.
Since you’ll probably be up for capital gains tax, I’ll leave it to you whether it’s worthwhile.
Or just use the proceeds to reduce bad debt such as a credit card. Would those shares return 17 per cent year in and year out? I don’t think so.
And just between you, Joe and me – promise not to tell the Reserve Bank – there’s even a case for switching your mortgage to interest only and using the savings to gear an investment.
I’m not saying you should because frankly the best and safest investment is reducing your mortgage, but it’s another way of generating good debt from bad.