With interest rates at eighty-year lows people seeking to accumulate wealth should be borrowing to buy good quality assets.
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The key is to select investments that will appreciate in value. It could be a commercial or residential property, business, farm, managed funds or shares.
There are plenty of uncertainties if you are the worrying type - trade wars, recession talk, Brexit, trouble in Hong Kong.
The latter two will have minimal effect on Australia and trade wars are unlikely be a big problem either.
A future global recession would be a problem. However central banks are working hard to prevent it and governments will assist to avoid it happening for political reasons.
It's hard to see how a recession could occur with interest rates so low.
... if you borrow to buy your own home it is not deductible but if you borrow against your home to buy an investment property it is deductible.
- Money Matters columnist Russell Tym
Finance is cheap for consumers to spend and businesses to expand.
As there is minimal return at the bank for investors they will move money into other assets causing them to appreciate further. Even gold is strong. Owning gold pays no income but now there is almost no income at the bank anyway.
Australian tax rules say that interest on borrowings for business or investment purposes is tax deductible, while interest on loans for private purposes such as buying a home is not.
It is the purpose of the loan not the security for it that determines whether interest is deductible.
For example, if you borrow to buy your own home it is not deductible but if you borrow against your home to buy an investment property it is deductible.
The aim should be to minimise non-deductible loans rather than reducing deductible loans on investments that will appreciate.
If a person is planning to buy a new home and retain their existing one as an investment, they should stop paying down the home loan.
It is best to save the cash or put in a mortgage offset account short term, then use it to pay a larger deposit on the new home and minimise the loan on it.
If the former home loan is principal-and-interest it can be converted to interest-only. With the new ultra-low interest rates borrowers should ask their banks to renegotiate their loan package.
Arrange a principal-and-interest home loan that can be paid down quickly and interest-only investment loans.
It is permissible to borrow against a home or other property to buy managed funds and shares and claim the interest tax deduction.
Such loans are deductible even if secured against the home and costing only home loan rates. Margin loans use only the new investments as security.
Borrowing at 4 per cent less a tax deduction to buy managed funds that return 7 or 8 per cent long term will build wealth.
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