SHOULD I PAY THE PRINCIPAL OFF MY LOAN?
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Articles by Salesh Chand.
I get asked this question on a regular basis. The answer is simple: yes you should pay the principal off your loan. But then the question arises, which loan should I pay first - investment or personal? And, how much should I pay?
You should always pay off your personal loan first as this is non-deductible for tax purposes. Unlike an investment loan, you get absolutely no tax advantage from interest payments that relate to personal debt. Once the personal loan is paid you should consider reducing your investment debt. Paying off your loans means you are continuously growing your equity so the banks will consider you to be less risky, and as a result they'll be willing to lend you more funds for further investments.
Exactly how much debt to pay should be calculated in relation to your personal budget and surplus cash. Firstly, you will need to look at your budget and work out what surplus cash you have available. Once you have determined this amount, you apply it towards the loan. This is what we call "forced savings", here at GRA. To help you work out what your surplus is, you can use our Wealth Suite software, which will also allow you to analyse cash flow positive or negative investments, and identify those investments you should be selling. But what if you don't have any surplus cash? Then you'll need to have a good hard look at your budget and see where you can cut back on your spending so you can create a surplus.
For any investor, cash/equity is king, so it is important that you are paying off your loan, and not using your surplus cash for impulse buying. The more equity you have, the safer you appear as a client in the bank's eyes. If there is another recession and the bank tightens their lending criteria, you will have no issues because your equity to debt ratio will be compatible with the bank's requirements.
So in summary, it is important that surplus cash is used to reduce personal debt first, followed by investment debt, for a better ongoing investing outcome.
For help with reducing your debt as discussed in this blog, please contact GRA on (09) 522 7955 or by clicking here.
Salesh Chand
Partner and Director of Business Services
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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Hi Salesh, I just wanted to send you an email on behalf of GRA to say how fantastic we have found your company to date. As you know, Ben and I joined GRA a couple of months ago and have just found you so amazingly helpful in getting our new property set up correctly and sorted out. We have what I would consider a rather complicated structure as a result and it’s a fantastic feeling to know that we are getting everything done in the best way possible. We have just had approval to put a minor dwelling on the property which will make a massive difference in terms of cash flow and obviously value, something we would never have even thought of without GRA and which we are very excited about. During the buying process we attended a seminar with Matthew and from the outset thought he was fab. We therein signed up for property school and found this nothing short of fantastic. The content was relevant, up to date and comprehensive, but more importantly it was taught in a way that we could actually understand and really get value out of. I wanted to mention also, that everybody GRA have recommended to us has been just so efficient and absolute masters at what they do. A wonderful network of people that we feel very lucky to now be able to call on. From Kris Pederson and Bryan Rist who put our mortgage together to the insurance guys they then referred us to, I’m super impressed. Within GRA, Ellery has probably turned things around for us faster than I’ve ever known before, something which we appreciated so very much when it came to crunch time. She’s always a pleasure to deal with and again, we’re stoked. We’ve just settled on the property today and are about to go and get the keys. I’m pretty pumped and hence this email is probably rather excitable. So, a massive thank you to you Salesh, the partners for such a fabulous 6 weeks at property school and everyone at GRA for their help. May this be the start of our property empire. Thanks again, - A & B - July 2015
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