Build wealth while reducing your mortgage
We have made it through another budget proposal avoiding changes to negative gearing rules, despite plenty of speculation in the lead up. This is good news for those wanting to implement this strategy to build their wealth.
There are two types of debt - good and bad debt. Good debt is a debt that has interest paid on it which is tax deductible (e.g. a margin loan). Bad debt is a loan that does not attract a tax deduction (e.g. personal credit cards, loans and your mortgage).
For generations the "Australian dream" has been to own your home. Once the mortgage has been paid off, people focus on building their wealth for retirement or some other goal.
There is an investment strategy that might present you with the best of both worlds; allowing you to pay off your mortgage while also building your wealth. This strategy allows you to use the equity in your home and ongoing mortgage payments to reduce bad debt. You can build your wealth through regular drawdowns of good debt and investing into a diversified portfolio.
Not only will you be reducing your mortgage and increasing your investment loan, you will also be averaging out the purchase price of your investments. The aim is to lower the average purchase price and reduce market timing risk to increase potential capital growth.
This strategy requires a certain level of income and an investment time horizon to make it feasible. You need an income stream to fund the increased interest payments and a marginal tax rate so you can take full advantage of the deduction. The time horizon should allow for the portfolio to be invested for the duration of market cycles without needing to sell at a loss.
This strategy provides great potential to increase your wealth, without a significant impact on cash flow, a lower level of initial debt and more flexible investment options.