Not All Debt Is Created Equal.
Debt has a reputation problem. The word itself tends to sit alongside words like "bad" and "dangerous" and "get rid of it as fast as possible." That framing leads to poor decisions.
Some debt costs you money. Some debt makes you money. Some debt does both at once, depending on how it's structured. Understanding the difference is one of the more practical things you can do for your financial position.
The Basic Distinction: Productive vs. Unproductive Debt
The most useful way to categorise debt isn't good versus bad. It's productive versus unproductive.
Productive debt is debt used to acquire an asset that generates income or grows in value. A mortgage on an investment property. A business loan that funds growth. In these cases, the debt is doing work. The asset it funded is generating a return, and the interest may be tax-deductible. The debt isn't eroding your position. It's being used to build it.
Unproductive debt is debt used to fund consumption. A credit card balance from a holiday. A personal loan for a car that depreciates the moment it leaves the lot. Buy now, pay later balances. This type of debt typically carries high interest rates and leaves you with no asset to show for it. It consumes future income to pay for past spending.
Most people carry some of both. The problem is when unproductive debt accumulates faster than it's being paid down, or when the cost of servicing it crowds out the ability to build toward anything else.
Interest Rates and the Real Cost of Debt
Not all debt costs the same, and the difference matters more than most people realise.
A home loan at 6% per year on a $600,000 balance costs $36,000 in interest annually. A credit card at 20% on a $15,000 balance costs $3,000 a year, and that balance is likely growing if only minimum repayments are being made.
The instinct many people have is to put extra money toward the mortgage because it's the biggest number. Mathematically, this is often wrong. Paying down the highest-rate debt first (a strategy sometimes called the avalanche method) reduces total interest paid faster than targeting the largest balance.
The exception is psychological. Some people benefit from paying off smaller balances first (the snowball method) because the sense of progress keeps them motivated. A plan you'll stick to is more valuable than an optimal plan you won't. But it's worth understanding the trade-off.
The Home Loan: Where Most of the Action Is
For most Australian households, the mortgage is the largest debt they'll ever carry and the one with the most room to improve.
A few things worth knowing:
Offset accounts. Money sitting in an offset account reduces the balance on which interest is calculated, without reducing the actual loan balance. This means you're earning the equivalent of your mortgage interest rate on those funds, tax-free. In a high-rate environment, that's meaningful. It also preserves flexibility: you can access the money if you need it, unlike extra repayments that are harder to redraw depending on your loan structure.
Redraw facilities. Extra repayments made into a variable loan are typically available to redraw. This allows you to reduce the loan balance and therefore interest costs, while retaining access to the funds. Not all lenders make redraw as easy as offset, and some charge fees, so the structure matters.
Fixed versus variable. Fixing your rate provides certainty over repayments for the fixed period. It also limits flexibility: extra repayments on fixed loans are often capped, and breaking a fixed rate early carries a break cost that can be substantial. Variable loans cost more when rates rise but give you more room to manoeuvre.
Principal and interest versus interest-only. Interest-only loans reduce repayments in the short term but mean the underlying debt isn't shrinking. They're sometimes used strategically, particularly for investment properties, but as a default for owner-occupied loans they extend the life of the debt and its total cost significantly.
Investment Debt and Tax Deductibility
When debt is used to acquire an income-producing investment (shares, a managed fund, an investment property), the interest on that debt is generally tax-deductible. This changes the effective cost of the debt.
An investor on a 37% marginal tax rate borrowing at 6.5% to invest has an after-tax borrowing cost of around 4.1%. That's meaningfully different from 6.5%, and it's one reason why investment debt is treated differently to personal debt in a financial plan.
The flip side is that deductible debt is still debt, and the investment still needs to perform well enough to justify the cost and the risk. Negative gearing (where interest and costs exceed income from the investment) reduces your tax bill but doesn't generate a profit. The investment still needs to deliver sufficient capital growth to make the overall position worthwhile.
This is a calculation that requires actual numbers, not rules of thumb.
Debt and Cash Flow: The Practical Reality
How debt affects your life day-to-day comes down to cash flow. A manageable debt at a high interest rate might strain your cash flow more than a larger debt at a low rate. The repayment structure matters as much as the balance.
When cash flow is tight, the priority order for debt repayment generally looks like this:
Keep up with secured debts (mortgage, car loan) to avoid losing the asset
Pay down high-interest unsecured debt (credit cards, personal loans) aggressively
Make minimum repayments on lower-rate debt while addressing higher-rate debt first
Once high-rate debt is cleared, redirect that repayment capacity toward wealth building
This isn't the only valid approach, and individual circumstances shift the order. But it's a reasonable starting framework for most households.
When to Get Advice
Debt strategy becomes genuinely complex when it intersects with tax, investment, and cash flow planning simultaneously. The question of whether to pay down your mortgage faster or redirect surplus cash into super contributions, for example, depends on your marginal tax rate, your super balance, your age, your interest rate, and your overall financial goals. There's no universal answer.
A financial adviser who looks at your whole picture, not just the debt in isolation, can model the scenarios and show you what the numbers actually look like across time. That's usually when the right answer becomes clear.
This article is general information only and does not take into account your personal circumstances. Before making changes to your debt strategy, speak with a licensed financial adviser.