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Reducing Your Personal Debt

“Today, there are three kinds of people: the have’s, the have-not’s,
and the have-not-paid-for-what-they-have’s”

– Earl Wilson (U.S. Politician)

One of the reasons why so many Australians are restricted in their ability to achieve their financial goals and dreams is because many are simply ‘drowning’ in debt.

When you are deep in debt, you hinder your ability to build wealth before you’ve even had the chance to begin. That is why a tailored wealth management plan should begin with an effective debt reduction strategy. Equiti distinguishes between two different types of debt:

Personal Debt:

    • is used to make lifestyle acquisitions;
    • does not generate an income stream;
    • interest cannot be claimed as a tax deduction;
    • the interest and the debt needs to be repaid from personal ‘after-tax’ resources;
    • should be eliminated as quickly as possible.

A home mortgage is an example of personal debt as is a loan on a motor vehicle or a boat.

Smart Debt:

    • is used to acquire investments assets;
    • generates an income and appreciates in value;
    • interest is tax deductible;
    • income generated from the asset goes towards repaying the debt;
    • since the debt is largely self-maintained, there is no urgency to eliminate.

A loan used to secure a residential investment property or to acquire a portfolio of shares is an example of smart debt.
With the support of an in-house mortgage management department, an Equiti adviser is able to tailor a financial strategy that will best help you to achieve your personal debt reduction goals. As qualified advisers and accredited mortgage managers, Equiti can implement a powerful Mortgage Recycling strategy that will enable you to convert personal debt into smart debt whilst building wealth at the same time.

About The Traditional Mortgage

Paying off a traditional mortgage can take up to 25 years. This is because the traditional mortgage has been structured in a way to reduce only very minimal amounts of the principal in the first 15 years.

On a $300,000 mortgage at 9% interest over 25 years, you actually repay a total of $755,000. That means that you are paying $455,000 in interest or, put another way, you will end up paying more on interest over the 25 years than you originally paid for the house!

You work; to earn an income; to pay tax; and once tax has been taken out of your income; your ‘after-tax dollars’ are then used to pay your personal debts. This means that you may have to earn as much as $1,400,000 before tax to repay your loan of just $300,000.

A tailored financial plan that addresses an efficient mortgage reduction strategy will enable you to:

    1. Increase the equity in your own home.
      By reducing your mortgage, you are able to increase your net worth even at a time when house prices are idle.
    2. Achieve greater financial security.
      Since owning your home is the great Australian Dream, you’ll feel as though a financial burden has been lifted from your shoulders once you’ve finished paying it off.
    3. Improve your ability to build wealth.
      By no longer having to make your regular mortgage repayments, you are able to divert that money from ‘non-income producing items’ to ‘income producing and appreciating assets’.

‘The Latte Habit’: Turning Your Spare Change Into Thousands

The most effective way to reduce your mortgage is to make extra repayments and to make them more frequently.

As a demonstration of how even small amounts of money can have a large impact on your debt reduction, let’s assume you buy an average of one latte a day. Your daily latte habit can easily add up to $120 a month. If this amount was contributed to your $300,000 mortgage each month, it will save you $78,000 in interest and take 3 years and 7 months off your 25 year mortgage.

In other words, your one latte a day habit could be costing you as much as $145,000 before tax!

Whilst we don’t want you to stop enjoying your daily latte, the purpose of this example is to demonstrate how even relatively small amounts of spare change can have a powerful compounding effect when contributed into your mortgage.

A personal debt reduction strategy: it’s just mathematics.