Written by Josh Kozis

Debt can be seen as something to avoid at all costs - and yes, unhealthy levels of debt can cause many problems within your financial situation. However, many successful financial plans will also include a healthy amount of debt. Read our five essentials on debt management - to ensure you have a healthy understanding of debt and the tools to help manage it.

Understanding the Tax Implications of Debt

Debt is often viewed as a financial burden, but understanding its tax implications and repayment strategies can help you make the most of it, especially when it comes to securing a stable future. In Australia, debt often plays a role in the journey toward home ownership which is seen as a road to financial security and the Australian dream. It’s no surprise that many Australians aim to retire debt-free to not only reduce stress but also enable greater financial flexibility in retirement.

Deductible vs. Non-Deductible Debt

In Australia, debt generally falls into two tax categories: deductible and non-deductible. Deductible debt is generally best tied to income-producing purposes, such as loans for rental properties, where the interest can be claimed as a deduction to reduce taxable income. In contrast, non-deductible debt which is often for personal use, like a mortgage on your home or a car loan, doesn’t offer tax advantages, meaning it’s often financially beneficial to pay down this type of debt faster.

The Power of Compound Interest in Debt Repayment

One reason to focus on repaying non-deductible debt quickly is compound interest. Left unchecked, interest on debt compounds, adding to your overall cost. By accelerating your repayments, you can reduce the total interest paid over time, which saves money and allows you to reach your debt-free goals sooner. We have a number of tips on this and will be delving deeper in an upcoming podcast series so keep an eye and ear out for that.

Optimising Repayment Frequency

An often-overlooked strategy to accelerate debt repayment is aligning repayments with your pay cycle. For instance, making fortnightly rather than monthly repayments on a mortgage can result in an additional month’s worth of payments each year. This subtle shift reduces the principal faster, which in turn saves on interest costs and shortens the loan term.

Making Use of Loan Features: Offset and Redraw Accounts

Certain loan features can also help manage and reduce debt more effectively. An offset account, for instance, links to your mortgage, allowing you to reduce interest costs by offsetting your loan balance with funds in the account. For example, if you have $10,000 in an offset account and a $200,000 mortgage, you only pay interest on $190,000. This feature can significantly reduce interest costs without requiring additional repayments. A redraw facility is another useful option, letting you make extra repayments on your loan and later access those funds if needed. While this doesn’t reduce the loan’s term as aggressively as an offset account, it can provide flexibility, allowing you to manage debt while maintaining access to extra funds.

Integrating Debt into Your Financial Plan

While debt can be a valuable financial tool, its effectiveness depends on careful management and alignment with long-term goals, like owning a home outright by retirement. Aiming to be debt-free in retirement can enable greater peace of mind and flexibility, helping you to enjoy your later years without the financial strain of repayments. By combining tax-smart debt management, accelerated repayment strategies, and effective use of loan features, you can make debt work for you, aligning it with your overall financial goals and paving the way to a more secure future.