Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
Pay Off Debt or Invest? The Best Strategy Explained
126 Plays15 days ago
What if debt could make you richer? In this episode, we break down how understanding “good” vs “bad” debt could help you build wealth faster—without increasing your income. Learn the exact strategies smart investors use (including interest-only loans and offset accounts) and discover the mindset shift that separates the wealthy from everyone else.
Recommended
Transcript
Introduction to Cost-Saving Strategies
00:00:00
Speaker
In the next 90 seconds, I'll show you exactly the strategy that could save you tens of thousands of dollars. And at the end, gonna reveal the secret way that rich people use debt to their advantage while everyone else, well, fears it.
Navigating the Australian Housing Market
00:00:13
Speaker
Welcome to the Buying Your First Home podcast, your personal guide through the Australian housing market. Here we tackle the big questions and the small details that come up when buying your first home.
00:00:24
Speaker
From financial prep to finding the right neighbourhood, we're here to ensure that you've got all the knowledge at your fingertips. So let's take the first step towards unlocking the door to your new home.
Managing Debt to Build Wealth
00:00:39
Speaker
Right now, the average Australian mortgage is around $665,000. And if you manage your debt wrong, you could be working until you're 70 years old. But if you get it right, you could build a multi-million dollar net worth using the same income that you have today.
00:00:52
Speaker
Here's what they don't teach you in school. There are two types of debt, toxic and useful debt. Toxic debt is like credit cards, anything up to 22% interest and you're losing money hand over fist.
00:01:03
Speaker
On top of that, your credit limit also drops your borrowing capacity by a lot. Every $10,000 in credit limit could drop your borrowing capacity by as much as $50,000. thousand dollars A mortgage where you're paying 6% per annum, while a property market is growing anywhere up to 18%, like in Perth, is actually quite useful debt.
00:01:21
Speaker
Looking at really simply, even if you're paying off just the interest in that loan, you could be making a 12% return per year.
Impact of Inflation on Debt
00:01:27
Speaker
Hex debt is also another good one. The interest rate on your hex is capped at either the consumer price index or the wage price index,
00:01:33
Speaker
whichever is law. In other words, your hex debt will never cost you more than its initial cost. It's pretty much the closest thing you can get to free interest. So I'm sure you want to know the difference between the wealthy and everyone else. everyone Everyone else thinks debt is the enemy, whereas the wealthy know inflation is the real enemy. Inflation over the past five years has averaged 3.42%. That means that every year your dollar is worth just a little bit less.
00:01:54
Speaker
And this compounds. So that $1,000 you put under your mattress in 2022 is only worth $840 in terms of purchasing power. You just lost $160 in five years. It's nuts. But inflation can also be your friend.
00:02:06
Speaker
3% inflation means your debt gets 3% cheaper in real terms every single year. Your $600,000 mortgage today will feel like it's worth just $440,000 in 10 years time. But while your debt shrinks in real terms, your property grows. A $600,000 property growing at just 5% will be worth $977,000 in years time.
Advanced Debt Strategies: Interest-Only Loans
00:02:26
Speaker
This next one is a pretty controversial strategy and it's only for advanced people. And before you consider it, I'd definitely suggest speaking to your accountant financial advisor to see if it makes sense for you. But if you've already got a home loan, here's a strategy that no one talks about.
00:02:39
Speaker
interest-only loans. Looking at the average person, most people pay principal and interest repayments, which costs them about $4,000 per month if you're just using the average loan. If you switch to interest-only during that period, your repayment drops to around $3,300 per month.
00:02:52
Speaker
That's about $700 extra per month in your pocket. What if you then use that $700 per month to buy another property, or you could even invest it say using something really high growth at an 8% return per annum?
00:03:03
Speaker
Now, I get it. You might be saying, you serious? Are you saying I shouldn't be paying off my mortgage faster? Well, I'm saying not for everyone. it's Like said, this isn't strategy for everyone, but for some people, it can make sense. If you can invest that money that you'd otherwise be paying on your home loan for returns higher than your 6% interest rate, well, it could make sense in your situation.
00:03:20
Speaker
And that's where the catch is. This only works if you can actually invest the difference. You can't spend it on cars or using it to buy holidays. You have to be incredibly disciplined to make that strategy work, which is why a lot of people don't do it.
00:03:33
Speaker
There is also the balanced approach. Look, I get it. For most people, that feels pretty risky. There's also different costs for interest-only loans, and it doesn't make sense for everyone.
Balanced Debt Management: Offset Accounts
00:03:41
Speaker
But there's definitely a middle ground for most people. I've had clients that have fought over this exact thing, and their solution was, well, pretty much 50-50 split. They put half their cash towards the mortgage for peace of mind, and the other half towards building investments for wealth. Another powerful option is using an Ofsted account.
00:03:54
Speaker
The money in your offset account reduces the interest you pay on your loan, but stays completely accessible. If you put $20,000 in your offset account, you pay no interest on the $20,000 of your loan, but you keep it liquid for emergencies or even opportunities.
00:04:07
Speaker
It's kind of the closest thing to having a cake and eating it too. But what is the action plan here?
Practical Steps for Financial Health
00:04:12
Speaker
Well, it's time to stop talking and start doing. Your number one priority today is look at any of that toxic debt and get rid of it.
00:04:18
Speaker
If you've got any outside credit cards, personal loans, any sort of cash flow loans, you need to start getting rid of that. That's non-negotiable. Generally, that interest isn't deductible and it's not going to help you grow your wealth. If you've got an existing home loan, speak to your broker or bank about adding an offset account.
00:04:32
Speaker
That money will be yours to access and can help you build up a buffer or you can use as future savings for investments down the line. Thirdly, sit down and do a budget. What gets measured gets managed and you want to work out how much money you've got left over at the end of the month.
00:04:44
Speaker
If you're still split on the strategy, one that could work for you is a split split 50-50. Use what you've got left over half of that to pay off your mortgage and the other half to invest. The biggest key here is not analysis by paralysis.
00:04:56
Speaker
It's really about shifting your mindset. If you're even considering getting the market or you've just taken out a mortgage, that mortgage may feel huge today. But Taking a step back, it's going to seem like nothing in 30 years time.
Shifting Mindset: Debt as a Wealth-Building Tool
00:05:07
Speaker
Ask anyone that bought a home in the 90s and thanks for inflation and wage growth, their repayments for that home from 30 plus years ago is probably pocket change now. But also think about those people that bought the 90s. It was a crazy time. They had to start somewhere and they chose action over analysis paralysis.
00:05:23
Speaker
The difference between wealthy people and everyone else isn't often their income. It's understanding that some debt can be a wealth building tool if you use it correctly. And it's no wonder so many Australians lose sleep over their mortgage, but the rest understand what I've just told you.
00:05:37
Speaker
Money definitely doesn't buy happiness, but it does buy choices. And right now, you have a choice
Taking Action: Hunter Galloway's Services
00:05:42
Speaker
to make. You can do nothing and stay stressed or you can try and take an action out of this video, even as simple as just writing down a budget, going through your transaction statements, looking at what you're spending this month and what you can cut out.
00:05:53
Speaker
So comment below. I'd love to know what action going to take after this video. Are you going to go through your budget? Are you going to cut your expenses? Are going to look at investing? At Hunter Galloway, we're a mortgage broker. We're the home for homebuyers across Australia.
00:06:04
Speaker
We don't charge any fees for our services. so if you want a free assessment, hit us up at huntergalloway.com.au. Until next time, I'll see you guys.