Finance structuring &
mortgage repayment

Are your loans properly structured?
Is your mortgage being repaid in a reasonable timeframe?
When did you last review your loans?

As a medical professional, debt can either be your best friend or your worst enemy. Some doctors and dentists use debt to their advantage and accumulate significant investments, while others use it to live beyond their means.

finance structuring

Good vs bad debt

‘Good debt’ refers to a situation where you use borrowed funds to acquire an investment asset that should increase in value, and where you are able to claim ax tax deduction for the interest on the loan. A typical example is property investment, which is very popular with medical professionals.

‘Bad debt’ on the other hand, refers to debt that is not tax deductible, such as your home mortgage, credit cards or personal loans.

There is a tremendous opportunity cost to bad debt, because medical professionals generally have a high marginal tax rate. When factoring in a 47% marginal tax rate, the real interest on your mortgage for example would be up to twice as much (i.e. 8% versus 4%).

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The main finance problem for many doctors and dentists

One of the biggest issues with many medical professionals is the size of your mortgage. You may want to live in a particular suburb for work reasons or because of the quality of the schools, but usually this comes with a hefty price tag.

As a result, for many medical professionals it is impossible to pay down your mortgage in 10 years, which is an ideal timeframe. The longer you take to repay your mortgage, the higher the interest cost and the less wealth you will be able to accumulate for retirement. Quite often we see clients where the size of their mortgage is a significant source of stress and also an obstacle to achieving financial independence.

You thus need to realise buying a home is one of the biggest financial decisions you will ever make, as it has such an impact on your financial future.

That is why many doctors and dentists seek our advice before taking that step. Through our financial modelling we can show you how quickly you could pay off your mortgage and how it will affect your other lifestyle goals.

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Reviewing your finance structure

We always recommend our clients work with an independent finance broker, as they are not limited to a single financial institution to find the best deal for you. At the very least you should review your finance every two years, to make sure you are getting a good rate, but also to make sure your loan structure still makes sense – for example, should you switch some off your loans from interest only to principal and interest? Particularly in the current interest rate environment it makes perfect sense to seek professional advice.

If you also run a private practice, you would ideally have a funding plan, which details your finance requirements for the practice (e.g. fit-outs, equipment, etc.).

Using debt to your advantage

‘Gearing’ is the term commonly used to describe the situation when someone borrows money to invest. It is also referred to as ‘leveraging’.

Gearing is often used as a tax-effective wealth accumulation strategy by medical professionals, for the following reasons:

• You are not limited to investing your own savings, as by borrowing you can achieve a higher initial investment balance. This may be attractive for young doctors and dentists who have not had the benefit of time to accumulate substantial savings. This might be a way to accelerate your wealth creation.

• As long as the investment was purchased with a view to producing assessable income, the interest costs on the loan should be tax deductible.

However, the one mistake doctors and dentists commonly make when it comes to gearing, is that you only look at the tax savings, and don’t pay enough attention to the actual quality of the investment. Just because a property offers a lot of tax deductions (e.g. depreciation), doesn’t mean it will make a good investment.

At the end of the day, you still need to make money, either through increased rent in the future, or capital gains on the sale of the property. We always recommend our clients seek professional and independent property advice.

While some advisers and accountants recommend doctors and dentists accumulate as much debt and properties as possible, we don’t believe in this. We have yet to see one client retire successfully on a multi-million dollar property portfolio: it is not practical to have that much debt and manage multiple properties, it is low-income yielding (1-2%) and is also high risk. We believe in a more balanced approach, that may obviously include property investment.

If you would like to discuss your current finance structure, talk about your home purchase or property investment plans, please contact us for your obligation-free meeting.

You can also download our free eBook in the Free Resources section of this website.

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