What are Debt Recycling Strategies and how it works

Debt recycling is an efficient means for improving the performance of your personal finances beyond traditional debt reduction strategies, which focus solely on reducing existing debt without looking at investment strategies.

Debt recycling strategy and examples

Debt recycling is an efficient means for improving the performance of your personal finances beyond traditional debt reduction strategies, which focus solely on reducing existing debt without looking at investment strategies.

Generally Speaking Debt recycling is a strategy used by Australians to recycle non-deductible personal debt (family homes mortgage) into tax deductible investment debt. This strategy has been commonly used by those looking to pay down their home sooner, invest and build a more tax effective portfolio.

For Example Debt recycling is a three-tiered financial strategy that aims to…

●Reduce your home loan

●Minimise interest and tax payable

●Generate future wealth

And this can often be achieved without drastic changes to current lifestyle or spending habits.

How debt recycling works

Most banks are prepared to lend up to 80% of the value of your home – for a home worth $580,000 (for example) the bank may lend $464,000, subtract the mortgage of $322,000 and you are left with $142,000 of available equity.

The available equity in your property is used as security for an investment-purpose loan; the borrowed money is used to invest in income-producing assets such as managed funds, an investment property or shares

The income generated from your income-producing assets, plus any tax savings that result from a geared investment, is used to pay off non-deductible (bad) debt in your home loan.

For Example :

Below is an example of how does debt recycling works:

- The borrower uses equity in their family home as security for an investment loan

- The investment loan is used to invest in assets such as an investment property or shares (the asset being income producing is important)

- Using the investment income received and any tax effective benefits from borrowing to invest, the borrower pays off their non-deductible personal home loan component

- As the non-deductible personal home loan component reduces, the home can be re-leveraged up with new investment debt to invest in more income producing investment assets

- Over time the non-deductible personal home loan is completely paid down and replaced with fully deductible investment lending

- Non resident investment loans

Offset accounts

The example provided above is debt recycling in its purest form, depending on your personal financial situation and goals there are options available that may deliver results better suited to your requirements, these include…

●Depositing all savings and paying all income into an offset account, this will reduce the home loan interest payable.

●Deposit rental income from the investment properties being bought into the offset account will reduce the home loan interest payable

●Contributing surplus cash flow to the home loan will reduce the home loan interest payable and increase the available equity enabling more of the bad debt to be transferred into good debt and investments.

●Having your home revalued every 2 – 3 years can free up more available equity enabling more investments to be acquired through tax-deductible borrowing.

●If your priority is investment growth, investment income can be reinvested instead of paying down bad debt to compound investment growth.

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