opinion
Nathan Birch

How to make debt work for you

By Nathan Birch
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If you want to build a multi-property portfolio, it's time to understand how to make other people's money work for you. 

In an advertising campaign both bold and heart wrenching, UBank has questioned whether the Australian dream of home ownership is worth slaving for.

In a 60-second film, six Australians diagnosed with a terminal illness talk about how their diagnosis has made them re-evaluate what is important in their lives.

UBank CEO, Lee Hatton, says the campaign is aimed at encouraging Australians to think more carefully about how much mortgage debt they take on.

“Our hope is that after you watch the film you will consider reviewing your own approach to spending your money on the things that are most important to you.

“Are you spending enough time with family and friends? Are you pursuing what you’re truly passionate about? Are there changes you need to make to find more time for your priorities?”

The film closes with a candid suggestion that many wouldn’t expect to hear from a mortgage lender: “Maybe it’s time we looked at things differently – Borrow less. Live more.”

It sounds like a noble sentiment – but would borrowing less really solve the financial issues of the average Australian family? Would it allow them to live life on their terms and achieve an early retirement, or choose their work/life balance based on what they want?

Even if we aren’t “overworking” to pay off a mortgage, it is likely that we will still spend the majority of our lives working anyway. After paying off the house, we have to keep working in order to save for retirement.

It doesn’t sound like this will give us much time to spend on the things that matter most in life, such as spending time with family or pursuing our life’s calling.

In order to achieve financial independence, it is necessary to look beyond the amount of debt we take on. Having a strategy that will allow us to exit the rat race sooner will enable us to focus on what is really important in life — without needing to worry about work.

More than half of home owners choose work before family.

The UBank advertising campaign comes alongside research conducted by the NAB subsidiary that reveals 56 per cent of mortgage holders miss out on spending time with family because they choose to work more in order to pay off their mortgage.

Other key findings include:

* 54 per cent of mortgage holders have gone without taking a family holiday due to financial pressures;

* 59 per cent of mortgage holders have cut a family holiday short because of repayment considerations; and

* 50 per cent of mortgage holders turn down at least two social outings a month because of mortgage pressure.

Ms Hatton says: “Australians are working too hard to pay off mortgages they can only just afford and subsequently not living comfortably.”

For those with a terminal illness that are featured in the campaign, this lifestyle may lead to some very heavy regrets.

“Getting richer just makes you poorer in terms of the really important things in your life,” says Ken, a man diagnosed with pancreatic cancer.

Kris, another of the six Aussies featured, points out, “If you are working your butt off to pay off a house – you’re probably going to be paying it off your whole life.”

It is certainly food for thought.

What choice do Australians have in an expensive property market?
For Australians living in the nation’s capitals, borrowing less hardly seems like an option. For average income earners, buying a house in Sydney means saving more than one year’s income just for a deposit.

It does seem crazy to take on more than a million dollars’ debt just to buy the family home, but this doesn’t mean we should give up on home ownership altogether.

Despite what most people think, debt can be good.

And, it’s not the size of debt that counts – it’s how you use it.

Using debt to build a portfolio of income-producing assets can help the property investor reach financial freedom well before those who simply borrow less in order to purchase their own home.

Debt can be beneficial if it is employed to generate wealth
The investor may have more debt than the home owner, but they are also accumulating more wealth by leveraging their finance in order to maximise gains. Borrowing money allows them to invest in more property, which, in turn, allows them to make a greater profit than they would have otherwise. 

If the investor purchases the right mix of properties with a strong cash flow, the income produced by these properties will pay down mortgage debt. This means debt won’t be eating into the investor’s lifestyle. 

And, while property prices continue to rise, the investor has the option of selling, renovating or subdividing for profit – allowing them more opportunities to boost their capital to pay down debt quicker.

Investing to buy your dream home
Many young Australians now buy investment properties before their PPOR. Purchasing affordable dwellings in other metropolitan areas with good growth prospects allows them to generate equity that could be used for further expansion. 

Once they have established a strong asset base, it may be possible to consolidate their portfolio in order to buy their first home.

As rents on their investment properties go up in time, paying down debt becomes quicker. Price growth ensures a good capital return, making it possible to sell some properties in order to pay down the rest.

An unencumbered portfolio brings passive income that could be used to lighten mortgage repayments on a PPOR, helping to pay off their home loan within a shorter time frame.

While this is just one hypothetical example, it shows that home ownership doesn’t have to mean a lifetime of overworking.

Getting over the fear of debt
Fear of debt is a common curse in Australia. While there are many forms of bad debt that inevitably lead to financial ruin, there is also good debt that can lead to financial freedom – if employed correctly.

Good debt is debt that is attached to an income-producing asset, such as an investment property.

Home loan debt isn’t necessarily bad debt, but it’s not that great either. Your home doesn’t produce an income, so you have to put your own income into paying it off.

So, why do so many people avoid investing over their fear of debt, yet, spend their lives paying off a PPOR?

Maybe they see the PPOR as a necessity and think of investing as being too risky.

In any case, there are ways to mitigate the risks of property investing.

The importance of minimising risk
If you are going to take on debt in order to build a property portfolio, it is essential to employ a strategy that minimises risk at every step of the way.

The best way to decide what strategy to take is to speak with the experts. Engaging a property investment expert will help you to identify where you are at and where you need to go. The right experts will help you tailor the best strategy for you — and make sure you stick to it too.

Having adequate insurance in place is also essential. The right cover will help to ensure your wealth creation strategy won’t turn backwards in the case of unexpected injury, illness or death.

It is best to discuss your wealth protection strategy with an independent financial planner who is not affiliated with one company, but can offer unbiased advice and a wide range of products.

Maybe it’s time we re-imagined the Australian dream
Since so many Australians struggle to maintain a healthy work/life balance while paying off their home, perhaps, as UBank says, it is time to do things a little differently. 

While borrowing less may be an option for some, using debt to generate an asset base of income-producing properties may be a quicker road to wealth for many others.

It all comes down to the way we view debt. If we stick with the old world view of debt as being bad, then we inevitably limit what debt can do for us.

If, however, we open ourselves to its wealth generating potential, while minimising risk at every stage of our investing, we will be taking the new road to home ownership.

The Australian dream will no longer mean a lifetime of overworking. It will become the domain of those who are financially savvy — those who can think outside the box to achieve their goals. And, those who can retire early in order to follow what they are truly passionate about.

 

 

 

About the Blogger

Nathan Birch

Nathan Birch

BInvested is Australia’s leading property investment group, developed for investors by investors to provide every service you need to start, grow and successfully maintain a profitable property investment portfolio from start to finish. Their 3 step strategy for investing involves buying properties below market value, with capital growth potential and those which are slightly negatively geared to positively geared. This strategy has helped every member of BInvested build their own extensive portfolios.

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