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Hi Shogun_star
You are asking the right questions.... Well done you. 
The reason that most people borrow 100% is because they want to get in the game as early as possible. If they wait and save to build up the 20% deposit they lose ground and the 20% amount required becomes larger.
An example is:
A property worth $100000 requires a deposit of $20000 to keep in in the right Loan Value ratio (LVR) area for banks. Let's say you work very hard and you save the deposit in two years. Property increases in value by a rough 10% per annum. So this means the property that was worth $100000 is now worth $121000. (First year $10000 making the property worth $110000. Second year $11000 making the property worth $121000)
You now need a deposit of $24200.
I guess you need to save for another 6 months.
You now have a larger mortgage and the rental return for the example probably hasn't gone up the 21% that the property has. Therefore the yield is not as good as it was.
The other factor is that a free hold home can be used as equity without actually having to sell the property or raise a mortgage against it.
By eradicating any personal debt and only having debt to raise an income all of the interest incurred becomes tax deductible. This is the best scenario. :P
An example is:
Free hold house worth $200000 can be used to raise a loan of $800,000. No there is not too many 0's there.
Remember the LVR is 80% loan and 20% you. so multiply what you have by 4. This gives you the total amount of the loan possible. Add the numbers together that is what your portfolio is worth. In this case a cool million.
Of course the banks then want to look at you debt serviceability. Can you repay the loan. Well the interest on the loan anyway. They all have their own little formulas for that.
As long as the loan is used as an investment to raise money (buying a rental property for example) the interest becomes tax deductible.
There are other things that are tax deductible as well but that is for another post.
The bottom line is personal debt is not tax deductible.
It costs you money to have that debt. Clear it as fast as possible. There are always circumstances that affect us all differently. No doubt some other forumites will disagree. But that is the beauty of this site.
Happy saving
Originally posted by shogun_star
The reason that most people borrow 100% is because they want to get in the game as early as possible. If they wait and save to build up the 20% deposit they lose ground and the 20% amount required becomes larger.
An example is:
A property worth $100000 requires a deposit of $20000 to keep in in the right Loan Value ratio (LVR) area for banks. Let's say you work very hard and you save the deposit in two years. Property increases in value by a rough 10% per annum. So this means the property that was worth $100000 is now worth $121000. (First year $10000 making the property worth $110000. Second year $11000 making the property worth $121000)
You now need a deposit of $24200.
I guess you need to save for another 6 months.
You now have a larger mortgage and the rental return for the example probably hasn't gone up the 21% that the property has. Therefore the yield is not as good as it was.
The other factor is that a free hold home can be used as equity without actually having to sell the property or raise a mortgage against it.
By eradicating any personal debt and only having debt to raise an income all of the interest incurred becomes tax deductible. This is the best scenario. :P
An example is:
Free hold house worth $200000 can be used to raise a loan of $800,000. No there is not too many 0's there.
Remember the LVR is 80% loan and 20% you. so multiply what you have by 4. This gives you the total amount of the loan possible. Add the numbers together that is what your portfolio is worth. In this case a cool million.
Of course the banks then want to look at you debt serviceability. Can you repay the loan. Well the interest on the loan anyway. They all have their own little formulas for that.
As long as the loan is used as an investment to raise money (buying a rental property for example) the interest becomes tax deductible.
There are other things that are tax deductible as well but that is for another post.
The bottom line is personal debt is not tax deductible.
It costs you money to have that debt. Clear it as fast as possible. There are always circumstances that affect us all differently. No doubt some other forumites will disagree. But that is the beauty of this site.
Happy saving
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