04 Jun Debt recycling: Could you benefit?
No one wants to be stuck in their late 50’s and still chipping away at their private home loan from centuries ago.
As home loans continue to rise and families continue to grow, people are looking for ways to pay off their home loan quicker and more effectively.
Enter: debt recycling.
How does debt recycling work?
Debt recycling is accomplished by distributing or recycling a private home loan into a debt by which the interest is tax deductible.
A private home loan is by nature, a non-deductible loan. By using a debt recycling strategy, you can turn this non-deductible debt into a tax deductible debt as it becomes your investment.
The investment loan is interest-only and the repayments that would have been made on that loan as well as the earnings on investment, are applied to the private home loan.
Who debt recycles?
Debt recycling is especially useful for people with private mortgages wanting to borrow funds for investment.
For example; borrowing money for investment in property or shares. The longer the period of debt recycling, the more wealth it creates in the long run.
What are the strategies?
To begin using any debt recycling strategy, you should have the basic fundamentals in line.
Free up your cash flow, by consolidating debts into a new loan. This ultimately gives you financial resources to start an investment.
Place all financial resources into the loan while redrawing funds to the investment portfolio until your debts have been converted into deductible debts. This can then be deposited into your investment accounts.
There is, however, another strategy that involves finishing one loan before spending another eg. An investment property. This means using all surplus money to pay your home loan first. The increased equity can then be borrowed back for investing which ultimately becomes a deductible debt.
Over time, your investment earnings can be used to pay off your private home loan completely.
Debt recycling is not an overnight solution, however due to the long-term nature of the strategy, you are actually creating more wealth while paying off your loan.
The benefits of debt recycling:
- Accumulation of assets for a longer period of time
- Growth potential despite a down investment market
- Retire earlier than initially planned
- Replaces non-deductable (bad debt) with tax deductable (good debt)
- Tax deductions can be claimed for interest paid on investment loan
If you would like to discuss your personal situation, we’d love to hear from you!
Talk to us today.
*Please note that the information provided is of a general nature only and has not been tailored to your personal circumstances. Please seek professional advice prior to acting on this information.