Debt Recycling
You may or may not have heard of debt recycling, however if you are borrowing to invest, and still have some personal debt (ie a home loan), then debt recycling is a fantastic way to achieve more with the same investment dollars, where you are using an investment plan.
When borrowing to invest, it is paramount that your structure is appropriate and tax effective to ensure that you not only get the most out of your investments themselves, but also to ensure that your borrowings provide you with the best tax deductions possible.
Debt recycling provides you with an environment that you can rapidly reduce your personal debt, while growing your investment debt (and Investments) at the same rate.
The concept behind Debt recycling is that for every dollar you invest into your investment portfolio, you can reduce your home loan by this amount, in addition to your standard home loan repayments.
This does require the use of specific loan facilities that allow split limits under the same global limit to work effectively, and it is wise to speak to a professional before setting it up to ensure that you have the structure correct at the outset.
As an example, let's say you wanted to invest $150 per week into an investment account that you were going to use to invest into managed funds at a later stage.
You also may already have an investment loan of say $40,000, and a home loan of $200,000, which is on a P&I basis already.
Rather than placing the savings into an investment account, you actually deposit this to your home loan, thereby significantly reducing the personal debt, and in this example saving 17 years and 6 months and over $207,000 of non deductible interest on your home loan itself.
You then recycle this debt you have just paid off your home loan by drawing down on your investment loan by the same amount (ie $150 per week) to contribute to your saving/investment plan.
The result of this is that while your overall debt level remains the same, you have effectively repaid money to your home loan, while increasing your investment debt, and therefore your tax deductible interest, by the same amount.
This strategy allows you to repay debt that is non tax deductible quickly while increasing your tax deductible debt at the same rate.
While it doesn't reduce your overall debt, it does increase the amount of tax deductions on your interest costs significantly, thereby providing you with a fantastic incentive from the ATO.
When borrowing to invest, it is paramount that your structure is appropriate and tax effective to ensure that you not only get the most out of your investments themselves, but also to ensure that your borrowings provide you with the best tax deductions possible.
Debt recycling provides you with an environment that you can rapidly reduce your personal debt, while growing your investment debt (and Investments) at the same rate.
The concept behind Debt recycling is that for every dollar you invest into your investment portfolio, you can reduce your home loan by this amount, in addition to your standard home loan repayments.
This does require the use of specific loan facilities that allow split limits under the same global limit to work effectively, and it is wise to speak to a professional before setting it up to ensure that you have the structure correct at the outset.
As an example, let's say you wanted to invest $150 per week into an investment account that you were going to use to invest into managed funds at a later stage.
You also may already have an investment loan of say $40,000, and a home loan of $200,000, which is on a P&I basis already.
Rather than placing the savings into an investment account, you actually deposit this to your home loan, thereby significantly reducing the personal debt, and in this example saving 17 years and 6 months and over $207,000 of non deductible interest on your home loan itself.
You then recycle this debt you have just paid off your home loan by drawing down on your investment loan by the same amount (ie $150 per week) to contribute to your saving/investment plan.
The result of this is that while your overall debt level remains the same, you have effectively repaid money to your home loan, while increasing your investment debt, and therefore your tax deductible interest, by the same amount.
This strategy allows you to repay debt that is non tax deductible quickly while increasing your tax deductible debt at the same rate.
While it doesn't reduce your overall debt, it does increase the amount of tax deductions on your interest costs significantly, thereby providing you with a fantastic incentive from the ATO.
