Debt management advice: what to pay off first.
Debt management advice in Australia tends to come in two flavours: frightening you, or selling you something. Neither is much use. We do the sums, work out the order to pay things off in, and tell you plainly where borrowing is building your wealth and where it is quietly eating it.
Your debts belong on the same page as your super.
A family on $250,000 with a $700,000 mortgage and $200,000 in super has one set of finances, not three. But debt advice usually comes from whoever is lending the money, and investment advice from whoever is selling the investment. The two almost never talk.
Here it's the same person doing both. So the advice takes account of what the loan does to your weekly cash flow, your tax, and whether you can still afford to put money into super. If you want a rough borrowing figure first, there's the borrowing capacity calculator.
Six decisions, in the right order.
Which order is right shifts with interest rates, your tax rate and what you own. Having an order at all is what most households are missing.
Repayment order
Clear the dearest debt you can't claim on tax first — usually credit cards and personal loans, then the home loan, then investment debt you can claim.
Good debt vs bad debt
Borrowing for something that earns money or goes up in value is a different animal to borrowing for something that wears out. The labels matter less than the rate and what's behind the loan.
Consolidation
Rolling small debts into a bigger, longer loan lowers the monthly payment but stretches the interest out for years. It only works if you put the saving straight back into clearing it faster.
Offset and redraw
Cash sitting in an offset account saves you interest at your home loan rate, tax-free. Redraw does much the same but you get at the money differently — and it matters for tax if you ever rent the place out.
Debt recycling
Slowly turning home loan debt you can't claim into investment debt you can. It works well done carefully, and does real damage done as a slogan off the internet.
Borrowing to build wealth
Borrowing is a tool, not the point. How much is sensible depends on how secure your income is, how long you have, and how you'd cope with a bad year.
When borrowing helps, and when it hurts.
Borrowing magnifies whatever the thing you bought does next. Against something that grows, with a steady income behind you, it builds wealth faster. Against something flat, or an income that might stop, it does the damage faster. The thing that matters most is how secure your income is — not the interest rate.
So we test your household against a 20% drop in income and a one per cent rate rise. If the plan still holds up under both, borrowing has a place. If it doesn't, the loan is too big — whatever the calculator says. That is also why we look at income protection on the same file as the loan, not separately.
- Income drops 20%
- Rates rise 1%
- Six months with no income
- Property falls 15%
- You have to claim on insurance
- Retirement comes up short
Questions we get a lot.
It comes down to the rate, your tax rate, and how long you've got. Paying down a 6% home loan is a guaranteed 6% return with no tax on it. An investment has to beat that after tax to be the better move. We put the numbers in writing so you can see it.
Sometimes. The risk is folding a credit card into a 25-year mortgage and still paying interest on a takeaway dinner two decades later. If you do consolidate, the money you save each month has to go straight back onto the debt.
Turning home loan debt, which you can't claim on tax, into investment debt, which you can. You sell an investment, put the money onto the home loan, then borrow it back to invest again. It suits households on a good income with plenty of time, and the ATO cares a great deal about why you borrowed — so it has to be done properly.
Yes. We hold a credit licence (CR 45250 of Outsource Financial) and compare more than 50 lenders. The advice and the loan come from the same place, which is the whole point.
Keep reading
- Financial planning overviewThe main page — what a plan covers and how it's written.
- Finance brokingHome loans, investment loans, refinancing. Same adviser.
- Tax-effective investingDebt you can claim, and how it is best owned.
- Superannuation adviceWhere super payments sit against paying off debt.
- SMSF advice and lendingBorrowing inside super, and the rules that apply.
Information on this page is general in nature. It does not take into account your personal objectives, financial situation, or needs. Read the relevant Product Disclosure Statement and consider whether personal advice is appropriate before acting on any information here.
Time to sort the order out?
The first conversation is free and you're not committing to anything. Bring the loan statements and a rough monthly budget.