Can you have your cake and eat it too – or in this case have a home loan and an investment portfolio?  You may be able to if you use Debt Recycling.

Debt recycling is a strategy that helps you turn your non-deductible or ‘inefficient debt’ into something that is efficient because it can generate income and a range of tax benefits. You use any income generated by this new efficient debt to pay off your home loan and the tax benefit to reduce your tax bill.  Your home loan is not deductible, because you live in it and get the direct benefit of ownership. 

It sounds like a ‘no brainer’, but recycling debt does come with one big risk – you are using your home as the investment vehicle and if the investment doesn’t perform well or there is a change in interest rates your home could be at risk. You really need to get the right advice to understand whether this option could work for you.

So how does it all work?  The strategy for debt recycling involves a couple of steps:

  1. The equity in your property is used as security for an investment purpose loan. This means that your home becomes the security against which your investment loan is held.
  2. The money you borrow is invested in an income producing asset, which could be a property, managed fund or a share portfolio.
  3. The income and tax benefit generated by this investment (the interest and expenses associated with the loan may be deductible) are used to pay off your home loan.
  4. You increase the investment purpose loan by the same amount you have paid off and reinvest that.
  5. Repeat the process until your deductible loan completely replaces your home loan.

If all goes according to plan, the benefits for you are that you pay off your home loan sooner, you are building wealth for your future and you are saving on your tax bill.

But this strategy is not for everyone.  You need to understand and be comfortable with the possibility of putting your home at risk.  You also need to determine whether or not you have to actually pay all the loans off in a sensible time period – are you thinking of retiring any time soon? 

To understand whether debt recycling is an option for you, given your own circumstances, it is essential that you get good financial advice.


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