debt management
Version 5.0
This document provides some additional information to help
you understand the financial planning concepts
discussed in the SOA in relation to debt management.
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with Statements of Advice prepared by its that takes into account the circumstances
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Debt management Variable rate loan
How to read Below is a brief description of the main Variable rate loans have an interest rate
this document types of loan facilities, features and risks. that may change. Therefore, minimum
repayments may vary with changing
Managing your finances to meet Fixed rate loan interest rates. Often, variable rate loans
your day to day requirements have a lower interest rate than fixed rate
Fixed rate loans protect you against the
as well as your long-term goals loans. Variable rate loans also have greater
can be a complex task. There risk of an interest rate rise by fixing the
features than fixed rate loans, such as the
are all sorts of issues you need interest rate applicable to all or a portion
ability to make additional repayments, vary
to consider such as taxation, of, your loan for a set period of time.
payment frequency, redraw facility, offset
legislation, protecting your wealth
If interest rates rise, you will have the facility and portability.
and assets, associated costs and
security of knowing the interest rate on
the inherent risks of investment.
When undertaking a financial plan the fixed portion of your loan and your
Be aware
it is important you understand how regular repayments will not change until
these issues will impact you and • If interest rates rise, your variable
what you should expect over time. rate loan and repayments are
Be aware also likely to rise.
Your financial adviser will provide
you with a Statement of Advice • If you are not using all the
• Fixed rate loans are often higher
(SOA) which sets out the details features of your variable rate
than variable rate loans.
of the advice and how it will meet loan, you may be paying a higher
your goals and objectives. • If variable interest rates fall during interest rate than needed.
This document provides some the term of your fixed interest rate
additional information to help you loan, you won’t benefit from this.
understand the financial planning
• Fixed rate loans generally have Redraw facility
concepts discussed in the SOA in
limited features and restrictions
relation to debt management. A redraw facility allows extra funds
are applied on additional
It is very important you read this repayments which may prevent paid into the loan (above the minimum
document to help you understand you from accelerating the requirement) to remain available to you
the benefits of the strategies repayment of your loan. upon application to your lender. Additional
recommended to you and the repayments made directly into the loan
associated costs and risks. • Early payout fees usually apply
to fixed rate loans.
Please contact your adviser if
you do not understand anything,
or need further information or Be aware
clarification.
the end of the fixed period. • Depending on your loan contract,
there may be fees payable and
some restrictions on minimum
amounts that can be redrawn.
• If you make additional
repayments directly into an
investment loan and then redraw
these funds for a non-income
producing purpose, the interest
expenses will not be fully tax
deductible.
Using an offset account to its optimum • potentially provide you with more cash
involves keeping all your income and any
Efficient debt flow at the end of the loan term that
savings in this account for as long as (tax deductible) can either be used to repay other debt
possible. This effectively minimises the In most cases, debt used to purchase or to make additional investments.
daily balance owing used to calculate your assets that produce income (for example, There are various debt management
loan interest and as a result, can also a portfolio of shares or an investment strategies that can be used to reduce
reduce the term of your loan. property) qualify for a tax deduction in inefficient debt. We have listed some
If you have an investment loan, there relation to interest costs. This form of debt common strategies below.
is an advantage in making additional is considered to be ‘efficient’.
repayments into an offset account rather Increasing your regular
than making the repayments directly Inefficient debt repayments
into the investment loan. While in both (non tax deductible) Increasing the size of regular loan
cases you will reduce the effective loan
Loans taken out to purchase services repayments involves transferring surplus
balance and save interest, you are able
or assets which do not generate income cash into your loan on a regular basis.
(for example, to purchase a principal This will result in a reduction in the
Be aware residence, a car or fund a holiday) do not interest charged and principal owing
qualify for a tax deduction in relation to the on the loan.
• You may have to pay a fee or interest costs. In these cases the debt is
higher interest rates for this facility. considered to be inefficient from a wealth
Be aware
creation perspective and is often draining
on your long-term wealth accumulation • Loss of access to your funds,
to withdraw funds from the offset account
capacity when not managed properly. unless the payments are made into
whilst maintaining full tax deductibility
an offset account or redraw facility.
of interest on your loan. Wherever possible you should try to
accelerate the repayment of your • Many fixed rate loans limit
inefficient debt. Outlined below are additional repayments and may
common debt reduction strategies. also charge a fee.
• By reducing the term of a fixed
rate loan, you may incur early
payout fees.