What is Debt Recycling?

A Smart Strategy for Building Wealth

Debt recycling is a financial strategy designed to help homeowners accelerate wealth creation while maintaining their mortgage repayments. It involves converting non-deductible debt (such as your home loan) into tax-deductible investment debt, all while building an investment portfolio.

How Does Debt Recycling Work?

The concept is simple:

• You use available equity in your home to borrow funds for investment purposes.

• As you make regular repayments on your home loan, you redraw or reborrow the paid-down amount and invest it in income-producing assets like shares or managed funds.

• Over time, your non-deductible home loan decreases, while your investment portfolio grows. The interest on the investment loan is generally tax-deductible, which can improve your overall cash flow.

Who Is Debt Recycling Suitable For?

Debt recycling is best suited to:

• Homeowners with stable income who can comfortably meet loan repayments.

• Individuals with a long-term investment horizon (typically 10+ years).

• Those comfortable with investment risk, as returns depend on market performance.

• People seeking tax efficiency, as the strategy leverages tax-deductible interest on investment loans.

If you’re risk-averse or have an unstable income, this strategy may not be appropriate.

How Are Loans Typically Structured?

A common structure involves:

• Primary Home Loan: Your standard mortgage on your principal residence.

• Investment Loan Facility: Often set up as a line of credit or split loan linked to your home loan.

• Regular Recycling Process: As you pay down your home loan, you redraw funds from the investment facility and invest them.

Example: Flow of Funds and Long-Term Benefits

Assumptions:

• You pay $1,000 per month off your home loan.

• Each month, you reborrow $1,000 from your investment loan and invest it.

• Investment growth rate: 9% p.a.

• Interest rate on investment loan: 6% p.a

• You are on the top marginal tax rate (47%).

• Timeframe: 10 years.

Investment Growth Over 10 Years

• Total invested: $1,000 × 12 months × 10 years = $120,000.

• Future value at 9% p.a. (compounded monthly): ≈ $190,000.

• (That’s $70,000 in growth on top of your contributions.)

Tax Savings

• Average investment loan balance over 10 years ≈ $60,000.

• Annual interest at 6% ≈ $3,600.

• Tax deduction at 47% = $1,692 per year.

• Over 10 years: ≈ $16,920 in tax savings.

Combined Benefit

• Investment portfolio after 10 years: $190,000.

• Tax saved: $16,920.

• Home loan reduced by $120,000 (because you’ve paid that down).

This strategy not only accelerates wealth creation but also improves tax efficiency while reducing non-deductible debt.

Ready to Explore Debt Recycling?

Debt recycling can be a powerful way to build wealth, but it’s not without risks. Professional advice is essential to ensure the strategy aligns with your goals and financial situation.

Contact us today for a personalised consultation and start turning your mortgage into an investment engine.

General Advice Warning

The information provided in this article is general in nature and does not take into account your personal objectives, financial situation, or needs. Before acting on any information, you should consider whether it is appropriate for your circumstances and seek professional advice. Past performance is not a reliable indicator of future results, and all investments carry risk.