How Can We Help You Pay Off Your Mortgage Faster?

The finance industry uses so much jargon. It can be intimidating sometimes.

Negative Gearing is spoken about in hushed tones so often I suspect it could even be a religion in Australia.

So lets make you sound smart at BBQs at the very least and work through a real world example of “Negative Gearing”.

The late Australian businessman Kerry Packer once said at a government enquiry:

“Now, of course I am minimising my tax, and if anybody in this country doesn't minimise their tax, they want the heads read. Because as a government, I can tell you, you're not spending it that well that we should be donating extra.”

If you have never watched it, here it is, what a great Australian he was! (skip to 7.30 ish if you dont want to watch it all)

And yes, negative gearing is a legitimate way to use the tax system for your benefit to buy an appreciating asset a to help you generate capital growth (and ultimately pay off your mortgage). By using negative gearing you simply reduce the cost out of your pocket each week to hold this asset (in this case an investment property) due to tax adjustments.

Lets work through an example:

Lets say you bought your home 5 years ago in Mona Vale, Sydney for $1,000,000. You used cash for a deposit and took out a mortgage of $800,000. Today the property is worth $1,600,000. You now have a mortgage of $750,000. You are deep in your career, earning a good income of $250,000 per year, kids and the busy ness of life. You don’t want to upgrade to a bigger home and mortgage but frankly, your boss sucks, you are paying huge amounts of tax and you would like a plan to pay off your current mortgage more quickly without too much ongoing effort.

Option 1

You pay an extra $10,000 a year into your mortgage after tax. After 10 years, your mortgage is now reduced by an additional $150,000 (roughly).

Option 2

You borrow equity thats now sitting in your home for investment purposes. You take these funds and buy an investment property In Ascot, Brisbane (freestanding home in a different growing market to spread your risk) for $800,000 plus stamp duty. The crux of this matter is that all of the debt you have taken out is investment debt and as such, fully tax deductible.

The weekly rent is $700 per week With all the interest and costs, less incoming rent, this costs you $18,000 per year pre tax.

However, as someone in the top tax bracket, you get a tax benefit from this loss of approximately $10,000 per year in this case.

This in effect, is the crux of what negative gearing is.

Your after tax cost is now $8,000 per year ($155 per week), to hold an investment of $800,000 using borrowings. Over time, if you have bought well, your rent will increase and within a few years the property will cost you very little, if not a positive return, each year.

You are probably right now saying to yourself…why would I want an investment that costs me $8,000 this year?

The crux of the answer is that after 10 years, you sell this investment. Lets assume 5% per annum price growth. That $800,000 property is now worth $1,300,000. If you sell it and clear the mortgage, you are left with approximately $450,000. Pay capital gains tax and that still leaves you with approximately $350,000 to put into your original mortgage (or whats left of it). Compared with option 1 this strategy has paid off twice the amount of your mortgage over the same time frame.

This is the whole point of negative gearing: You are using the tax system legally to help you hold an investment that has a negative cost in the beginning for a much larger payoff at the end.

The Basic Rules of Negative Gearing and Pitfalls to Watch Out For

• In an ideal world you want “positive gearing” - that is, no funds out of your pocket. However given rental returns, this is really only going to be possible in generally low priced areas. These are more often than not places large groups of people don’t aspire to live and, as a rule, they don’t tend to have high capital growth. “Negative Gearing” is born from the fact rent versus prices is not a favourable equation!

• You want to focus on negative gearing in high capital growth areas. Think beach suburbs and desirable localities in capital cities. You want to ensure you purchase a quality property at the right price with high capital growth prospects.

• The first magic is in the tax benefits . Negative gearing tends to work best if you are on the top or next to top tax bracket. In the 2026 financial year, this means you are earning $190,000 plus on the top tax bracket. In the early years you want to ensure you are likely to maintain a higher income to put you in these tax brackets. If you earn less than $135,000 per annum, this strategy does not generally work as well and you may be better off paying down your mortgage as per Option 1.

• The second magic is in what you sell the property for at the end. This is where the strategy succeeds or fails as a worthwhile endeavour.

• Property can have unexpected costs - repairs, remediation, issues with poor tenants, strata and time hassles. Tax regimes can change. Be conservative in your financial forecasts.

• Investment properties are illiquid. If you change your mind and want to upgrade your home or change your life you may need to sell this investment early, resulting in a not optimal outcome.

Can I do this with Shares and Managed Funds?

Yes, and I used to be a investment adviser specialising in sharemarkets, however, in my experience, the average Australian is far more comfortable with property - its price stability, lack of volatility and as such, I believe people are more able to stick with the long term plan with this strategy. Message me to discuss the pros and cons.

How do I Choose the Property?

What not to buy - off the plan in areas flooded with units, low capital growth areas. We recommend using a professional to assist you with locating the type and location of property. We have some great people we can recommend.

This is just a simple worked example. There are many assumptions, variations and complexities. I hope I have helped you understand the jargon of ‘Negative Gearing” and how average Australians go about paying off their mortgages using this strategy.

In summary, ‘Negative Gearing’ is just short hand for “using the tax system to your benefit to improve your financial situation”.

I must stress that I am not a tax adviser and no longer operating a financial planning license, I am just a mere mortgage broker. If you are contemplating a strategy like this you must consult your professionals in this area. I am here to educate you on the jargon and how to put this strategy into place - I can work with your financial team with how to set up your loan structure and with which lender. I can help you with the logistics from start to finish. Whatsmore, I have used this strategy myself. It works if you do it right.

Questions or want to get started? Contact me at [email protected].