This week’s advisor is Jacob McCudden, from Back to Back Financial Planners. Here’s what he said in response to Isabella’s question:

Easy.

Borrow the least amount you can and repay it as fast as you can.

That’s it.

In practice there are many ways this can be achieved:

• Don’t overspend why buying a home – that is, don’t just borrow what the bank will lend, remember, it’s in their interest to lend you as much as they can, only the government is the one holding them back to “lend responsibility”. They are not your friend, they are not helping you out, they are selling you a financial product (i.e. a mortgage) and will be paid handsomely for it in the form of interest at your expense (literally). As an anecdote, they say when you buy a house you pay for it twice, once for the purchase price, and again on the interest you will pay to the bank over the life of the mortgage

  
  Don’t believe me?

  
  Average mortgage debt of about $600k, interest rate of 5%, loan term of 30 years… total repayments to the bank = $1,159,535 ($600k in principal, $559,535 in interest).
  

• Start by understanding how much of your household budget can be allocated to “housing”, ideally under 30%, but no more than 40%. Then you can easily work out what repayments you can afford and thus how much you can borrow, but also when you want to be “debt free”, ideally before retirement but potentially even earlier (so whilst it may be a 30-year mortgage, that doesn’t necessarily mean you should be taking 30 years to pay it off)

• Don’t fall into the pressure of the bank/broker/real estate agent who all profit from the more you borrow and spend (easier said than done, I know, but this is most likely the biggest expense of your life, so it pays to take it extremely seriously and to do your homework)

• Then, once we’ve actually got the house and loan, you need to think about things like perhaps using offset accounts (if and when they make sense and they may not for everyone as loans with offsets generally come with a higher effective interest cost)

• More technical strategies could include debt recycling, which is where you leverage investment assets as a tool to slowly replace your “bad debt” (aka non-deductible debt like your mortgage) with “good debt” (aka deductible or investment debt), but these should be “advisable” before you embark on one.

• Seek advice! As really the only way to put together a strategy for your individual situation and help you decide what’s right for you is to speak with a financial planner who can develop a plan to help you achieve your financial goals (e.g. pay less interest over life of loan, pay of loan faster, be debt free, retire early, etc.)

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