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Your Mortgage Is Not A Monster · My Accounting Advantage

• 0:04
  Speaker: Hello, and welcome back to the podcast, My Accounting Advantage.
• 0:08
  Speaker: My name's Lee Woodward, and joining us today is our star of the show, Mai Harris.
• 0:14
  Speaker: Welcome back.
• 0:14
  Speaker 1: Thank you, Lee.
• 0:15
  Speaker 1: Nice to be back.
• 0:16
  Speaker: Today we're going to do a case study that I think affects thousands of people, and it's a good relatable story.
• 0:24
  Speaker: And the title is Your Mortgage Isn't a Monster. The debt we frame, that calms your brain.
• 0:32
  Speaker 1: Yes.
• 0:33
  Speaker: Take us into this one.
• 0:34
  Speaker 1: Well, this episode I wanted to talk about because, you know, I have a real life case study where last week I've met with a client, a couple, and they're in their late 50s.
• 0:48
  Speaker 1: And they owe around about $400,000 on their home.
• 0:52
  Speaker 1: But their house is worth like $1.5M, you know, and it's a nice house.
• 0:58
  Speaker 1: I asked them if they enjoy living there and they love it.
• 1:01
  Speaker 1: But business took a downturn a bit.
• 1:04
  Speaker 1: So the As many have.
• 1:06
  Speaker 1: That's right.
• 1:07
  Speaker 1: It's it's getting tougher for businesses to, you know, operate and um earn the profit.
• 1:12
  Speaker 1: They took a bit of a hit there and they're just feeling a bit down on themselves.
• 1:17
  Speaker 1: And um, look, we're in our late 50s now, and we still have a substantial amount of mortgage.
• 1:25
  Speaker 1: They were downed and they're just, you know, not feeling great about their situation.
• 1:31
  Speaker 1: But what I'm trying to help them see through is, you know, you've got to reframe the way you think about your mortgage and whether or not is that big that you can't get your head around and and paying it down quicker and how.
• 1:49
  Speaker 1: It can be a bit of a double-edged sword if you see it as a negative thing, puts you down.
• 1:55
  Speaker 1: So your mindset is clouded, and also that will affect your business performance and the way you live.
• 2:04
  Speaker: I agree with this.
• 2:05
  Speaker: Many times I speak to people and there's nothing wrong, they just see it wrong.
• 2:10
  Speaker 1: Yes.
• 2:10
  Speaker: And if you can fine-tune and move the needle and say you're upset about your mortgage, but really if you didn't have a mortgage and you were renting and we go ten years forward, you'd be really upset.
• 2:24
  Speaker: Whereas right now you're investing in you.
• 2:26
  Speaker: You're not paying somebody else's mortgage off, you're paying your own.
• 2:30
  Speaker: And the fact you're blessed to have your own, a lot of people can't qualify for a loan now.
• 2:36
  Speaker: When you got a loan, meaning the person in question, it was different.
• 2:40
  Speaker: You are so lucky you've secured the mortgage, you've got the property, you love living here.
• 2:45
  Speaker: Maybe we're seeing it wrong.
• 2:47
  Speaker 1: Yes, I I believe that too.
• 2:48
  Speaker 1: And it's all about um the way you're looking at things.
• 2:51
  Speaker 1: So I helped them break it down, you know, like and just say, look, what do you have in the offset account?
• 2:57
  Speaker 1: They have $100,000 in the offset account.
• 3:01
  Speaker: A lot of people don't understand offset accounts.
• 3:03
  Speaker: So we're going to do a double wonderful moment with our accountant here.
• 3:06
  Speaker: But those people that just pulled over the car going, what's an offset account?
• 3:10
  Speaker: Could you explain that?
• 3:11
  Speaker 1: Yes.
• 3:11
  Speaker 1: So basically when you have a home loan and you need to specify this with your bank that you want a separate account that you can put money in, and that money sits against your home loan so that it can reduce your interest on that loan on a daily basis.
• 3:31
  Speaker 1: Good thing about the offset account is you can actually access the cash at any time.
• 3:36
  Speaker 1: So it's available to you if you do need to use it.
• 3:40
  Speaker 1: There's another way to do it is to have a redraw, but basically paying down your debt and then have the ability to redraw the amount that you've paid down out to use.
• 3:55
  Speaker 1: So there's two ways.
• 3:57
  Speaker: What's the best way.
• 3:58
  Speaker 1: Well, I I particularly like the um offset, but um because you're still paying the same amount of loan repayments, but just less in terms of ratio between the interest and the principal.
• 4:14
  Speaker 1: So if you're you have a lot more money in your offset account, it really lowering your interest that you pay on your loan.
• 4:23
  Speaker 1: So the portion of the interest on that um monthly repayment will be adjusted.
• 4:30
  Speaker 1: You just pay more in principal repayment and pay less in the interest portion.
• 4:37
  Speaker 1: So you'll actually pay your house off quicker that way by having the money in the offset account.
• 4:44
  Speaker: Mai, give us the simplest rule of thinking on this.
• 4:49
  Speaker 1: Yeah, so basically, um, you know, you need to compare the cost of debt versus, you know, um what would you be paying if you didn't have that debt?
• 4:59
  Speaker 1: For example, you know, the couple that I was trying to help, they were paying 6% on um their home loan in terms of interest and their repayments and everything.
• 5:12
  Speaker 1: It comes to about $600 a week, which is quite manageable for um for them.
• 5:20
  Speaker 1: And I said, look, just compare it.
• 5:23
  Speaker 1: If you don't have this debt, you would actually be paying probably about $1,200 a week to live in this house.
• 5:32
  Speaker 1: So you are actually saving money and you are actually winning.
• 5:36
  Speaker 1: And if you were to downsize in the future, you will, you know, be able to sell it and then grab the profit.
• 5:46
  Speaker: Tax-free.
• 5:47
  Speaker 1: Yeah, tax-free as well.
• 5:48
  Speaker 1: So that's that's that's really good.
• 5:51
  Speaker 1: So they start feeling a bit better then.
• 5:54
  Speaker 1: You know, I said, look, just look at it this way.
• 5:57
  Speaker 1: That the is the cost of debt it better than not having debt?
• 6:02
  Speaker 1: And the answer is yes.
• 6:05
  Speaker: And I think having a mortgage, they should change that word mortgage to a self-improvement loan that improves your life.
• 6:14
  Speaker: There's nothing worse than seeing people with spare cash because they don't have to pay a mortgage and it goes fast, versus when you're paying your mortgage, it's not a sad thing.
• 6:25
  Speaker: You're investing back in you.
• 6:27
  Speaker 1: Yeah, and people are so fearful of being in debt as well.
• 6:31
  Speaker 1: So, like, just put it into perspective, right?
• 6:34
  Speaker 1: I um when I was 19, I didn't have a lot of money.
• 6:39
  Speaker 1: No, no money, really.
• 6:40
  Speaker 1: But I want to um own a house.
• 6:43
  Speaker 1: So I need to borrow most of it.
• 6:45
  Speaker 1: I had to borrow 95%.
• 6:47
  Speaker 1: And um, that's debt financing, you know.
• 6:51
  Speaker 1: But you gotta realize that sometimes debt is not a bad thing.
• 6:56
  Speaker 1: Your mortgage is not a monster, it might just be a way that you can actually grow your wealth.
• 7:04
  Speaker 1: Look at it that way.
• 7:06
  Speaker 1: Why is that?
• 7:07
  Speaker 1: Because um, you know, all through for the past 20 years now, I actually debt finance all my investments.
• 7:16
  Speaker 1: So what I do is basically I have a have a look at what equity that I have in my home, and then I I borrow that.
• 7:25
  Speaker 1: I invest in um share portfolio or property investment.
• 7:31
  Speaker 1: It's not like a a real property, is basically property funds like managed funds.
• 7:37
  Speaker 1: And um they come with a guarantee return, for example, of 10%, and then they do pay um annual yield, it's like a um dividend of 6%.
• 7:51
  Speaker 1: So because they they didn't want to borrow, right?
• 7:55
  Speaker 1: So they um trying to find like a private equity investors.
• 7:59
  Speaker 1: So I go into that.
• 8:00
  Speaker 1: What happens?
• 8:01
  Speaker 1: I um borrowed the money out using my equity, and that cost me 6%.
• 8:06
  Speaker 1: But I've been guaranteed, you know, uh 10% growth plus six to nine percent yield every year.
• 8:17
  Speaker 1: So and I have been getting nine, so that means I'm actually three percent ahead for not doing anything.
• 8:28
  Speaker: Very powerful.
• 8:29
  Speaker 1: Yeah.
• 8:29
  Speaker 1: So basically just getting the loan out at six percent, but my return is nine.
• 8:37
  Speaker 1: So I'm gaining three percent for not doing very much at all.
• 8:43
  Speaker: Being smart with your money and understanding that debt is an opportunity, and I think when you see it that way, everything starts to change.
• 8:52
  Speaker 1: I yeah, I think so, Lee.
• 8:53
  Speaker 1: So a lot of people really feel that no, I don't want to be in debt.
• 8:58
  Speaker 1: But if you don't really have the cash to invest, but you have the equity in your home, for example, don't miss that opportunity.
• 9:08
  Speaker 1: You can steal negative gear, don't for um forget that, um, to buy, you know, share portfolio and whatnot, but do seek advice first and make sure that you know you know what you're going, you are getting yourself into are the returns guaranteed.
• 9:27
  Speaker 1: In um a lot of cases, you know, like um um property um unit trust or whatever, you you can select a certain um certain investment that offer you that um guarantee on investment, then that might be uh a good option for you.
• 9:46
  Speaker 1: And um that interest on loan that you borrow out to invest is tax deductible against that income.
• 9:56
  Speaker: Lots of clarity in today's topic.
• 9:58
  Speaker: What's our final wrap-up?
• 10:00
  Speaker 1: The final wrap-up is, you know, it look at debt as a tool rather than something that you should be fearful of.
• 10:08
  Speaker 1: And if you are not sure about the tax deductibility of it, do get in touch with us at myaccountingadvantage.com.au and we can take you through and the plan and provide you with more clarity that way.
• 10:24
  Speaker: Mai Harris, another wonderful addition.
• 10:26
  Speaker: I look forward to next week when we're doing you don't have a tax problem, you have a timing problem.
• 10:32
  Speaker: Mai I see you next week.
• 10:34
  Speaker 1: Thanks, Lee.
• 10:34
  Speaker 1: Looking forward to it.