Making the most of debt?

Our Experts Answer:

At the point where the home becomes an income earning asset the revenue costs associated with deriving income will become deductible, this will include interest on any debt that funded the acquisition of the property.
Moving forward though, the revolving credit facility, when used as a saving tool as you are may in fact not be tax efficient. This is because each time you reduce the debt you are seen to have made a standalone reduction in the loan balance of the deductible debt. If funds are reborrowed for a private or domestic purpose the interest on these redrawn amounts is technically non deductible. At a practical level it can become very difficult to actually determine what portion of the debt incurs interest that is deductible and what is private when this activity is the norm.
It may be better to alter the way you save to plan to reduce the revolving credit loan with sums that you can afford to leave in the revolving credit without the need to redraw i.e pay your costs out of your monthly income and then make a permanent reduction with what you can actually afford to save. The extra interest you incur will be very minor an any event. The reality of most revolving credits is that they are drawn to their limits all the time and people just can’t apply the necessary discipline to actually use them effectively as a debt reduction tool. It’s all too easy just to use the available credit and the balance often grows rather than falls. This may not be the case for you but it is for many.