Smart strategies… to get debt in order
Nicholas Lipscombe, NAB Private Wealth Private Client Executive, shares his top 4 debt strategies.
Your first step to a smarter debt strategy is to get a clear picture of your overall financial position.
To do this, list all of your debts and ongoing expenses including property loans, investment loans, car loans, credit cards, business ventures, insurances and taxes, as well as general living, so you know what you’re paying out each year or month.
In doing this exercise, most people only include large ticket items such as their property mortgage. While this debt may be your highest by dollar value, smaller debts may have higher interest rates which can add up and erode funds that could otherwise be used for wealth creation.
Having various loans with different financial institutions could be costing you more in extra fees and administration. Debt consolidation within the one institution will give you greater buying power that can translate to better rates and structures for your debt needs.
Your Private Banker or Advisor can help you understand your true debt position and review where debt can be spent most effectively.
About 50% of Australians who have a property loan are ahead in their mortgage repayments, yet 65% of us have never considered refinancing which may save us even more in interest or give a client a better vehicle for housing their entire debt needs. The reason is that most of us are too time poor to investigate possible alternatives.
Debt consolidation may also assist in the creation of an optimum debt strategy. This involves more than accessing the lowest interest rate on one type of loan. It may also involve structuring and consolidating multiple debts into one portfolio with the same interest rate to get the maximum return on your money.
Lines of credit, portfolio facilities or tailored debt loans, when structured in the right way, can also help you achieve this. For example, a line of credit secured with residential property could cover your banking needs across transaction accounts together with personal, home and investment borrowings, all within one facility. This approach is designed to help you build wealth at competitive loan rates while allowing you easy access to the equity in your property. You could have up to a dozen sub-accounts to organise, manage and control funds you need for different purposes from one line of credit.
You could also save interest with a 100% offset facility on variable sub accounts within this structure. This can help cut your total interest bill faster than holding numerous separate loans at different interest rates and terms. An additional benefit people may be unaware of is continued access to your permitted lending limit for an indefinite period. This allows you to draw down funds to take advantage of investment opportunities as they arise without having to reapply for finance each time.
Use good debt
Smart investors use good debt to buy assets which will increase in value over time or produce a regular income stream.
Investments in that category include property, shares, corporate and government bonds, foreign currency, notes and bills.
An investment loan is worth considering if you want to diversify your portfolio but don’t have the full amount of capital you need. Although you will pay for the debt funding, there are many great investment opportunities that your banker can source for you that can still produce a good yield net of any interest repayments you need to make.
Depending on your individual situation and the structure you use, taking out an investment loan to buy an investment property, shares or other securities may also help you save and build wealth faster.
Maximise your Self Managed Super
Superannuation rules allow self managed superannuation funds (SMSFs) to borrow to purchase property under certain prescribed conditions.
This type of debt strategy has potential wealth building and income producing advantages for the fund which can benefit individuals.
Basically, the fund borrows from a bank to buy a commercial or residential property. The borrowed funds plus the SMSF’s loan deposit are placed in a security trust. The security trust trustee is a separate entity that buys and holds the assets as legal owner for the SMSF under the trust agreement.
At the discretion of the SMSF trustee, the security trust trustee guarantees the loan to the SMSF trustee and provides a mortgage over the asset to secure the guarantee obligations. Net income from the asset flows from the security trust to the SMSF. Interest and other expenses relating to the asset are met by the SMSF. Once the SMSF repays the borrowed funds to the bank, the mortgage over the asset can be discharged.
Getting your debt in order can make a big difference to your overall wealth position.
Please contact us to discuss the options that are open to you to maximise the return on your investment by managing debt strategically in worthwhile ventures that keep producing income for you.