Debt Recycling

Debt recycling is a strategy which seeks to reduce non-tax deductible debt (your mortgage) as quickly as possible whilst at the same time, build wealth tax effectively over the longer term.

Typically the steps to this strategy involve:

  1. Client has a home with a mortgage and some equity in home
  2. Client borrows against equity in home and uses loan to invest in income producing assets
  3. Income from investment is used to pay off non-deductible debt (home loan)
  4. Interest on investment loan is tax deductible. This creates a tax saving which is also paid into the non-deductible debt
  5. At the end of the year, client further borrows the amount by which the non-deductible debt has reduced in the year
  6. Repeat 1 to 5 again next year, until all non-deductible debt is replaced by deductible debt

Potential benefits of using a debt recycling strategy include:

Client can create an investment portfolio sooner, instead of waiting to invest until the home loan is paid off. This occurs by borrowing to invest in the investment portfolio, and changing non-deductible debt into deductible debt.
The income and tax savings from the geared investment portfolio are directed into the non-deductible debt, reducing the time it takes to pay it off.

This strategy might be suitable for clients that:

Have equity in their home
Are comfortable with, and have the capacity to borrow an amount each year to invest in income producing investments
Are in stable employment, and have sufficient cash-flow/income to meet the interest costs on the investment loan
Would like to accumulate wealth outside of superannuation over the medium to long term, and
The borrower should be on a marginal tax rate of 34% or higher

Using Debt Recycling along with a combination of a number of other strategies, loan terms can be slashed even further – which can save you hundreds of thousands of dollars in interest over the term of your loan.

Speak to us to understand if this is something you may benefit from.