Earlier this year, l had paid off 1/30 of my mortgage on my tax-deductible investment property debt.
I also have a main residence (that I live in), a non tax-deductible debt.
Any accountant would (and does) tell me I’m a fool for paying off my investment property debt whilst I still have other non-tax deductible debt.
But I do it anyway!
Because tax isn’t everything.
Good debt, bad debt
I understand, probably more than most, the concept of good vs. bad debt.
Good debt is where you’ve used borrowed money to purchase an asset that’s expected to go up in value, like shares and property.
Bad debt is where you’ve used borrowed money to purchase either a depreciating asset, like a car or boat, or to consume as part of your lifestyle — think credit cards or personal loans.
A mortgage on a quality property falls squarely into the good debt category. But good or bad, I still look at the bank app every so often and see almost $700,000 that I must repay at some point. That I am responsible for.
Interest rates in the mix
I have this debt in an environment of record low interest rates.
Eventually interest rates will go up.
And every 1% that rates go up will cost me approximately another $7,000 per annum on my debt. That’s an extra $583 per month that I need to find.
That makes me nervous.
Not enough to make me regret my purchase, but enough to have a healthy respect for the level of debt that I hold.
And so, even though it’s not advantageous from a tax perspective, I choose to repay my investment property mortgage on principle and interest to keep that debt down.
It makes me feel better.
So while it’s great to understand how tax interacts with debt, how the system works, and try to make the most of it, we need to keep an eye on the bigger picture. The tax ‘advantage’ that I’ve foregone in the last 12 months is about $300. I’m ok with that for the peace of mind my approach brings me.
What makes the most sense on paper isn’t always what makes the most sense in practice for everyone. We need to take in the big picture — in this case the interest rate environment, the future cost of my loans and my comfort level — when making our financial decisions.