Debt: good vs. bad

Fundamentally, you have to understand that there is good debt and bad debt. The difference comes down to the tax deductibility of debt. Personal debt for things like a car or a home you live in is non-taxable, while debt for business or investment purposes is different.

This has created what some call an "epidemic" where people buy expensive properties with low rental yields primarily to claim interest expenses on their tax return, thereby reducing their tax obligation.

How to make interest only loans work for you

This strategy is typically for someone who:

• Has already purchased their first home

• Potentially owns or wants to purchase an investment property

The strategic loan structure

Here's how you would structure your finances for:

A home loan:

• Keep this as your non-taxable debt

• Pay it down as quickly as possible

An investment property loan:

• Switch to an interest-only loan

• Do not pay down the principal

• Your mortgage balance remains unchanged

• You're only maintaining the debt by paying interest

Financial benefits

• Reduces your monthly payment

• Use the payment reduction to pay down your home loan principal

• Closes down your home loan balance faster

• Minimize interest paid on your home

• Interest on the investment property becomes tax-deductible

Fundamentally, you're structuring your funds so the maximum amount goes towards paying down your home while:

• Maintaining an investment property

• Minimize tax payments

• Preserving potential capital gains

Important things to think about

Bank assessment

• You cannot simply call your bank and request an interest-only loan

• They will conduct a full financial assessment

• Moving from principal and interest to interest-only is easier

Time limitations

• Maximum interest-only period: 5 years

• For a 30-year mortgage, this means:

  • 5 years interest-only

  • 25 years principal and interest

• Proves your ability to repay the loan

• Reduces how much you can initially borrow

Refinancing opportunities

• After the interest-only period, you can request refinancing

• When cash back offers are available, some people refinance strategically

• Some banks offer cash back per property, not per client

• We've seen clients collect $12,000-$15,000 in cash back by refinancing multiple properties

Caution: home loan considerations

Note: keeping your home loan on interest-only means:

• Your loan balance does not reduce

• You do not increase home ownership

• This is a personal choice

Disclaimer: This is informational content. Always discuss specific financial strategies with an accountant or financial expert who can provide personalized advice tailored to your circumstances.