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What is Debt Recycling?
Debt recycling is a method of turning your current non tax-deductible debt, such as your mortgage, into a more beneficial tax-deductible debt. Any debt that is used for personal reasons, like buying a home or car, is not tax deductible – however, the equity in home loans can be recycled and invested to become tax-deductible. At its core, debt recycling involves paying off the minimum on your home loan and investing as much as possible.
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How does Debt Recycling Work?
Once you have equity in your home loan, you can take money back out of the loan to utilise for investing. You can access equity in the property to take out an investment loan which can be utilised in assets which produce income, such as shares and bonds.
It works like this; each pay cycle you continue to put money towards your regular home loan. As you pay off more money, the line of credit available in your investment loan will grow larger. You can then withdraw these funds to invest in income-producing assets. Your overall debt remains the same, but you can utilise portions of it to generate wealth.
It is crucial that you can cover the monthly expense of this new loan out of your current cashflow. However, once you have your loan and investments set up, the earnings can be diverted into paying off your home loan and the interest on the investment loan is tax-deductible.
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Are there any risks involved?
While debt recycling is a great option to simultaneously pay off your home loan more quickly and generate more wealth, it is important to consider your own personal financial situation. Debt recycling may work in your favour now, but it is crucial to consider the impact that a rise in interest rates or a fall in investment values would have on your financial position.
Debt recycling is complex and if you are averse to a high-risk strategy, you may wish to steer clear. In that case, as long as you maintain a high savings rate and make strong investments, you are likely to be financial independent regardless of whether you choose to recycle your debt.
When all is said and done, long-term returns from shares may be higher than mortgage rates and debt recycling is a viable strategy to consider if you have equity in your home loan and wish to generate wealth through other investments.
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How We Can Help
Debt Recycling can be a useful strategy to reduce your mortgage while simultaneously generating more wealth. It is important that you speak with one of our financial advisors at Endorphin Wealth Management in regards to these strategies to make the most out of your personal circumstances. For an obligation free discussion, call us on 03 9190 8964, or email us at [email protected].
