Debt is an accepted part of life for property investors. It quite simply comes with the territory.
Experienced investors recognise the difference between good debt (tax deductible) & bad debt (non-tax deductible used to acquire assets that don’t produce an income).
Less well recognised is that there are good ways to pay down debt.
Financial experts have teamed up with API to identify 12 creative strategies to help exterminate your debt faster.
Here are just a few tips:
SIMPLE SACRIFICES
If you’re willing to make some simple sacrifices in your lifestyle, you might well find the dollars saved will have a big impact on your mortgage over the long term. Here are five ideas to set you on the sacrifice path.
- Make your lunch
- Give up smoking
- Give up your morning coffee routine
- Hire rather than buy clothing for weddings & major events
- Sell unwanted items.
GOLDEN RULES
As well as looking for creative ways to reduce your debt more quickly, it’s always worth keeping in mind the golden rules of debt reduction.
- Consolidate your debt – if you have any out of control debts spread among credit cards and personal loans, which charge high interest rates, it’s often a good idea to consolidate all of that debt under your home loan so that you’re paying a lower interest rate.
- Pay off non-deductible debt first – credit card debt, personal loan debt and even debt on your own home isn’t tax deductible. For this reason, it’s often best to pay off this debt before paying off deductible debt, such as that used to buy an investment property.
- Pay off debt with the highest interest rate – if you have a number of debts using different facilities, prioritise them by looking at the interest rate you’re paying. The debts with the highest interest rates must go first.
- Budget – budgeting is the biggest factor in being able to reduce debt quickly. “How you manage your cash flow has by far the greatest impact”
- Pay more frequently – paying more frequently pays big dividends, especially switching from monthly payments to fortnightly repayments, while keeping the amount paid at half of a monthly payment. This is because borrowers paying fortnightly end up making one extra payment per year.
- Pay more than the minimum – paying just a little bit extra in each repayment cycle will make a big impact on your debt over time. Another option is to keep your repayments at the same level as before interest rates fell. By ignoring rate cuts and maintaining higher repayments, borrowers hasten the pace of their journey to outright property ownership.
Australian Property Investor August 2009 www.apimagazine.com.au
