Why Debt Management is Important for Australian Expats – Most Australian expat investors (property investors in particular) understand the importance of using debt in leveraging returns, but we frequently see negative consequences caused by the lack of management and review of these facilities.
Debt is the biggest double-edged sword that most investors have to deal with, and people’s natural aversion to debt can cloud judgement to the long-term detriment of their financial well-being.
One of the terrible myths about managing debt is that you should pay the debt with the highest interest rate first.
Well, actually no, you pay the non-tax deductible debt off first even if the interest rate is almost nothing because that’s the one that will impact your cash flow most dramatically when interest rates rise.
Recently we had a new client engage our services who had lived and worked in Asia as an expat, and who were buying two Australian Properties.
One was a forever house in Sydney and the other an investment unit some 30 minutes up the coast.
The properties were separately mortgaged but the interest rate on the investment unit was significantly higher than the forever house.
Unfortunately, the client believed the myth about paying off the highest interest rate first, and they had aggressively paid off the principal and interest of the investment unit and paid interest only on the forever house mortgage.
In the present circumstances with the fixed rate on the forever house (now the client’s principal place of residence) converting to a variable rate, the investment unit is now positively geared (despite the higher interest rates).
The clients are now materially worse off than they would’ve been if they simply sat down and worked through the likely scenarios around their living circumstances, Australian income on return to Australia, and the value of deductible debt once re-established as tax residents of Australia.
So in this short post we want to encourage you to review your current mortgages and discuss your debt structure and repayment strategies.