Most people these days have too much unproductive debt and not enough debt that is actually going to increase their wealth over time.

For instance, consider a person who thinks that it is better to pay down their mortgage, because they have an excess of funds every month.

This is a great mindset but if they started paying extra onto their mortgage, they would be using after tax dollars, which means they have already lost 37 cents in every dollar.

Simply put, a mortgage is unproductive debt because it’s not tax deductible, whereas an investment loan is. So essentially, an Investment Loan is both Tax deductible (pre tax dollars) and using the banks’ money to create wealth. This is called Productive Debt.

It would be better for this Investor to purchase another Investment Grade Property, in a capital city, rather than try to pay off their home loan quicker.

They can definitely afford to have the additional property long term, because of their current excess cash flow every month.

Buying another investment property and paying interest only on their home loan, they will reduce repayments on their unproductive debt, whilst increasing tax benefits of the productive debt, on the new investment property.

So in a decade, this investor will achieve enough capital growth in the new investment property, to significantly pay down their home loan, if they decide to sell the investment property, without using a cent of their own money.

If they continue to have excess cash flow every month, they could even consider buying another investment property, to achieve the same results.

Investors need to really understand the difference between productive and unproductive debt, so that they can make the most out of the productive kind, and work towards achieving financial freedom without having to ever use their own money.

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