Did you know you can turn non-deductible home loan debt to deductible debt through refinancing?
Personal debt is debt that has been taken out for a private purpose. The interest on personal debit is not tax-deductible. In most cases, personal debt arises due to the purchase of the family home. The family home is a private asset and thus the debt is private debt.
Personal debt is expensive debt and therefore should be repaid as quickly as possible. This is because the interest must be repaid using after-tax money.
Certain Strategies Can Help Repay Debt
With careful debt refinance, you can accelerate the re-payment of expensive non-deductible debt.
The idea is to borrow to pay all outgoings where the interest on the borrowing is tax deductible, so that the level of deductible (i.e. cheap) debt increases. You would then use the cash flow from the business for the rapid repayment of expensive non-deductible debt.
1. Use Business Debt to pay all costs where interest is tax deductible.
2. Business cash reserves (from profits) are used for non-deductible debt.
It is important that once the non-deductible debt is paid off, the deductible debt is paid off too, so that the total amount of deductible debt does not increase out of control.
Example:
If the non-deductible home loan started off at, say, $400,000, and the interest rate is 7% per annum, then at a marginal tax rate of 47% (including Medicare) this strategy will save the owner $13,160 (ie $400,000 x 7% x 47%) cash each year. If the $13,160 cash saving is used to pay back the loan then, ignoring the other scheduled principal repayments, the loan will be paid off completely in about 16 years.
Such is the power of compound interest and structuring your finances the most effective way!
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