{"id":5020,"date":"2015-07-03T01:00:20","date_gmt":"2015-07-02T15:00:20","guid":{"rendered":"http:\/\/realestatetalk.com.au\/?p=5020"},"modified":"2015-07-03T01:00:20","modified_gmt":"2015-07-02T15:00:20","slug":"how-to-manage-escalating-housing-debt-john-mcgrath","status":"publish","type":"post","link":"https:\/\/channels.realty.com.au\/realtytalk\/how-to-manage-escalating-housing-debt-john-mcgrath\/","title":{"rendered":"How to manage escalating housing debt – John McGrath"},"content":{"rendered":"

In his recent column in\u00a0Switzer<\/a>, John McGrath gives some timely advice about staying out of financial trouble.
\nDebt management is crucial to successful property investment.<\/p>\n

Here\u2019s what he had to say:<\/h4>\n

For most Australians, buying real estate is the biggest financial transaction of their lives and pretty much always involves a seriously high level of debt.
\nFor the record, this is what we call \u2018good debt\u2019 because you\u2019re borrowing to purchase an asset that will grow in value over time and contribute to your long-term financial security.\u00a0\"John
\nBut you\u2019ve still got to manage that debt in the meantime.
\nCoreLogic RPData has analysed the latest household finance figures from the Reserve Bank, which show the\u00a0ratio of housing debt to disposable household income at a record high of 140.3%<\/a>.
\nIt\u2019s been this way for a while \u2013 since around 2005, but is now trending a bit higher.
\nOn the flipside, the value of the average Australian\u2019s home and property investments is far higher than the debt on them, with a ratio of housing debt to assets of 28%.
\nSo if the average Australian encountered some kind of crisis, they could sell their assets to pay down their debt pretty easily.
\nBut who would want to do that?
\nThe aim of the game in property is to buy and hold long-term.
\nTo do this, you need to be able to manage your debt.<\/p>\n

Tips for managing debt:<\/h4>\n

1. Interest rate buffer<\/strong>
\nThe most important thing you must do \u2013 whether buying for home or investment, is build in a buffer for interest rate rises.
\nLoan periods are typically 25-30 years and your repayments will be your biggest expense.
\nYou might be able to lock in a rate of 4.5% for five years today, but rates won\u2019t be this low forever.
\nThey\u2019ll be back to 6-8% at some point during your loan period so you need to make sure you can afford your repayments when rates are that high.
\n2. Financial safety net<\/strong>
\nYou need a safety net for emergency or unforeseen situations.
\nThis is a smaller amount of money that you could perhaps park in redraw to cover extended vacancy periods on investment properties, major repairs to your home or investments and time off work.
\nInsurance products like income protection will also give you peace of mind that if you get sick and can\u2019t work for an extended period, you will still be able to afford your repayments and other property expenses.
\n3. Principal and interest on home loans<\/strong>
\nMost owner-occupiers will have a principal and interest loan on their home, which enables you to build new equity as you pay off the principal.
\nPrincipal and interest loans are a good idea because the interest is non tax-deductible and you have to pay it in after-tax dollars.
\nThe quicker you pay back the principal, the less money you\u2019ll pay overall over the life of the loan.
\nThe debt on your home is the one you want to pay off first \u2013 before investment property debt.
\n4. Interest-only on investment loans<\/strong>
\nTypically, an investor will own their own home with a mortgage and use equity in that property to fund or partly fund an investment purchase. An interest-only loan will mean lower repayments, which is good for cash flow, and your interest payments will be 100% tax deductible.
\nSome people feel uncomfortable with interest-only loans because they\u2019re not making any headway towards owning their investment asset outright.
\nBut you\u2019re far better off ploughing every spare dollar into your home loan because that debt is non-tax deductible.
\nOnce you own your home outright, then it might make sense to go principal and interest on investment loans \u2013 depending on your goals.
\n5. Variable versus fixed<\/strong>
\nFixed rates give you peace of mind but little flexibility.
\nIf you\u2019re considering a fixed loan, make sure you understand the terms and restrictions, such as break fees if you decide to sell the property.
\nThe best part about fixed loans is they give you security in terms of budgeting \u2013 the repayments stay the same, no matter what happens in the economy and housing market.
\nGetting comfortable with housing debt is an important step towards financial security.
\nDon\u2019t overextend yourself \u2013 ever.<\/strong>
\nBut don\u2019t let fear of debt stop you from buying good quality property assets \u2013 one to live in and others to rent out.
\nThey might come with debt today, but they will provide security and income for you down the line.
\nAs always, I advise you to consult your accountant or tax advisor before you make any decisions.<\/p>\n","protected":false},"excerpt":{"rendered":"

In his recent column in\u00a0Switzer, John McGrath gives some timely advice about staying out of financial trouble. Debt management is crucial to successful property investment. Here\u2019s what he had to say: For most Australians, buying real estate is the biggest financial transaction of their lives…<\/p>\n","protected":false},"author":176692471,"featured_media":4688,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[13],"tags":[],"class_list":["post-5020","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-latest-story"],"yoast_head":"\nHow to manage escalating housing debt - John McGrath - Realty Talk<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/channels.realty.com.au\/realtytalk\/how-to-manage-escalating-housing-debt-john-mcgrath\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"How to manage escalating housing debt - John McGrath - Realty Talk\" \/>\n<meta property=\"og:description\" content=\"In his recent column in\u00a0Switzer, John McGrath gives some timely advice about staying out of financial trouble. Debt management is crucial to successful property investment. 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