Walk into any bank and they would love to offer you a mortgage to buy your first home. Few people stop to think what it actually costs for the loan. For 30 year mortgage loan with monthly repayments at 6% interest, you end up repaying 216% of what you borrow. eg. 500K loan = $1,079,191 in repayments.
As this is ‘non-deductible debt’ you should also factor in the fact you have to pay it with after tax earnings on which you have paid at least 30% income tax. So, you then need to earn $1,541,701 over the 30 years (or $4,282.50 per month) to secure the purchase of your family home.
Each $100,000 of non-deductible debt will cost you $6,000 each year (at 6% interest rate) but when you convert this into pre-tax earnings, it’s really costing you $8,571.
Compare this to $100,000 of deductible debt which costs the same amount but because (as long as you are earning enough) you can claim it as a deductible expense, you get a 30% rebate, so the real cost is more like $4,200. That’s $4,371 cheaper each year than non-deductible debt.
So, that’s why it makes sense to pay off your non-deductible debt first.
By moving $100,000 of equity from your deductible debt into your non-deductible home loan now, can save you over $115,000 of interest over a 30 year loan term.
If you’d like to find out more about how this strategy may apply to you, please contact Fusion Private Wealth to request a complimentary discussion paper meeting.