What is debt recycling?by Wealth Architects / 08.08.2018
We all know that recycling is great for the environment. But debt recycling? Well, if done right, that could be great for your own little patch of planet earth.
There are three things that many Aussie property owners wish they could do: make their debt tax deductible, pay off their mortgage sooner, and invest in other asset classes to build towards future wealth.
Well, with debt recycling it’s possible to achieve all three. But it’s a somewhat complicated strategy that’s not without risks.
But first, what exactly is debt recycling?
The idea behind debt recycling is to take the non-deductible debt from your home and recycle it into tax-deductible debt.
That is, use your surplus cashflow to reduce your mortgage debt and replace this with debt that is used for investment purposes (e.g. shares).
The earnings accrued from your investments can then be used to pay off your home loan.
If done effectively, not only can you pay off your home loan much faster, you can also generate higher levels of wealth as your home and investments grow in value over the long term.
Who might it suit?
Debt recycling is a higher-level financial strategy that is more suitable for certain individuals including those who:
– Are happy to invest for the long-term (7 years plus), as opposed to seeking immediate returns.
– Have a high marginal tax rate (greater benefits from tax-deductibility).
– Have a good appetite for risk.
– Have a secure income source that is not affected by investments.
When executed properly, debt recycling offers a number of significant benefits, such as:
– Allowing you to start investing almost immediately, even if you have no existing source of finance with which to get started.
– You don’t require years of investment practice to begin debt recycling (although it is highly advisable to work alongside an experienced financial adviser).
– It can help you to cover the gap between your superannuation savings and your retirement targets.
– It can help you to pay off your mortgage earlier and relieve your debt burden.
Though it is true that you can reduce risks by gaining a firm understanding of debt recycling and other investment strategies, you will never be risk-free.
The two major risks you face are:
1. In the same way that you benefit from compounding gains over time, a market downturn can compound losses, meaning that the amount you eventually owe could be more than the value of the portfolio.
2. You could also be at risk of losing your home if you use the existing equity in your home as security for the investment loan.
Is debt recycling right for you?
It’s fair to say that debt recycling isn’t for everyone. Like most things in life, it will depend on your personal circumstances.
So if you’d like to find out more, get in touch. We’d be more than happy to run through your options with you.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.