We all know that recycling is great for the environment. But debt recycling? Well, if done right, that could be great for your own little patch of planet earth.
There are three things that many Aussie property owners wish they could do: make their debt tax deductible, pay off their mortgage sooner, and invest in other asset classes to build towards future wealth.
Well, with debt recycling it’s possible to achieve all three. But it’s a somewhat complicated strategy that’s not without risks.
But first, what exactly is debt recycling?
The idea behind debt recycling is to take the non-deductible debt from your home and recycle it into tax-deductible debt.
That is, to replace your mortgage debt with investment debt.
The earnings accrued from your investments can then be used to pay off your home loan.
If done effectively, not only can you pay off your home loan much faster, you can also generate higher levels of wealth as your home and investments grow in value over the long term.
Who might it suit?
Debt recycling is a higher-level financial strategy that is more suitable for certain individuals including those who:
– Are happy to invest for the long-term (5 years plus), as opposed to seeking immediate returns.
– Have a high marginal tax rate (greater benefits from tax-deductibility).
– Have a good appetite for risk.
– Have a secure income source that is not affected by investments.
The benefits
When executed properly, debt recycling offers a number of significant benefits, such as:
– Allowing you to start investing almost immediately, even if you have no existing source of finance with which to get started.
– You don’t require years of investment practice to begin debt recycling (although it is highly advisable to work alongside an experienced financial planner).
– It can help you to cover the gap between your superannuation savings and your retirement targets.
– It can help you to pay off your mortgage earlier and relieve your debt burden.
The risks
Though it is true that you can reduce risks by gaining a firm understanding of debt recycling and other investment strategies, you will never be risk-free.
The two major risks you face are:
1. In the same way that you benefit from compounding gains over time, a market downturn can compound losses, meaning that the amount you eventually owe could be more than the value of the portfolio.
2. You could also be at risk of losing your home if you use the existing equity in your home as security for the investment loan.
Is debt recycling right for you?
It’s fair to say that debt recycling isn’t for everyone. Like most things in life, it will depend on your personal circumstances.
So if you’d like to find out more, get in touch. We’d be more than happy to run through your options with you.
If you would like assistance getting your accounts under control as we approach the end of financial year, call us today on 1300 79 80 38.
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At Assure Wealth we specialise in helping busy, successful families structure their finances to achieve greater wealth and financial peace of mind.
Author: Pat Casey – Managing Director & Financial Planner Sydney – Assure Wealth
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Disclaimer: The information provided on this website has been provided as general advice only. We have not considered your financial circumstances, needs or objectives and you should seek the assistance of your Walker Lane Pty Ltd Adviser before you make any decision regarding any products mentioned in this communication. Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither Walker Lane nor its related entities, employees or agents shall be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information.
Assure Wealth Pty Ltd ABN 31 965 466 780 Corporate Authorised Representative no. 1244817, Patrick Casey Sub-Authorised Representative no. 1244748 of Walker Lane Pty Ltd ABN 70 626 199 826, an AFSL holder No 509305.
