Home loans: Four good debts you can add to your mortgage

A home loan can be a handy financial tool to help you get richer. Here’s how to use the debt wisely.

A mortgage is much more than just a big, scary debt you have to pay to enjoy homeownership.

It’s an opportunity, thanks to today’s record-low interest rates, to get ahead financially, whether through building wealth or better managing your other debts.

First, understand the difference between good and bad debt.

Put simply, good debt is any debt that can increase your wealth or deliver you personal value. Bad debt is the stuff that’s used to buy things that lose value, such as credit cards, car loans and buy now, pay later schemes.

Some types of debt are worthwhile adding to your mortgage, especially with the low cost of borrowing.

Here are four examples.

INVESTMENT LOANS

Most people need money to make money
and investment debt is usually the best way to do this.

Think real estate investment. Almost all investors wouldn’t be able to afford to pay cash for their property assets, so they take out bank loans.

This strategy is even more attractive in the current climate where investors can pay 3 per cent interest on a mortgage but receive rental income at a higher rate while claiming a tax deduction on the interest cost.

It’s not just real estate – the share market typically pays income yields above 4 per cent and many quality companies’ dividends are higher than that.

For borrowing to invest, a mortgage is often the best tool because it charges the lowest interest rate.

A mortgage is always a balancing act and sometimes it’s good to add to it.

DEBT CONSOLIDATION

Credit card debts can cost borrowers about
20 per cent in interest, while payday loan interest rates are higher.

If someone has a pile of personal debt they just destroy, a debt consolidation loan can be an option.

But there’s one big rule when doing this: cut up the offending credit card or other loan that got you into the trouble. Otherwise, the process might be repeated and a fresh debt spiral begins.

By consolidating debt, several frustrating monthly repayments can become one single payment and the reduction of interest costs resulting from using a low-interest mortgage should free up extra cash to pay down that consolidated debt faster.

BUSINESS LOANS

Starting or building a small business is growing an asset, just like property or shares.

So any debt used to help build this business is generally good debt, as long as it is done carefully with the help of professional advisers. You don’t want to throw money at a business idea that’s going nowhere.

And you don’t want business debt to consume you because of a change in operating conditions – such as a pandemic.

EDUCATION COSTS

I was once wisely told that the only thing you can buy your kids and be assured it doesn’t get crashed, lost or destroyed is a good education.

That same principle applies to yourself. Investing in your own education – from
extra vocational training to a university degree – can dramatically increase your earnings potential.

If you have to borrow money to boost your brainpower with new professional knowledge, it’s a fair price to pay.

Originally published as Home loans: Four good debts you can add to your mortgage