Debt Recycling

What is Debt Recycling?

Debt recycling is about making your debt work for you. It involves paying off your non-deductible debt (home loan) and replacing it (recycling) with deductible debt to create wealth. Why is deductible good? It means you can claim a tax deduction for any interest paid on the loan which in turn will reduce the tax you pay. You make the same repayments but also get a reduction in your tax. You can then use these funds to create wealth through an investment property or portfolio.

How does it work?

Importantly, it's not for everyone.

• You need a home loan with some equity to draw down.
• It suits a long-term investment horizon.
• You must have a high tolerance for risk and willingness to ride short term fluctuations in investment markets.
• Strong cashflow is a must! A great buffer of cash flow surplus will make the volatility easier to bare and strategy easier to maintain.
• Income protection insurance should be considered to protect your income if you are unable to work due to illness or injury.

What are the benefits?

• Debt recycling allows you to build more tax-effective debt (and reduce the non-deductible debt) for the purpose of building an investment portfolio.
• You may pay off your home loan sooner.
• Using debt to increase your investment portfolio gives you access to potentially more capital growth and income.
• Having a larger investment portfolio with the use of debt allows you to increase the diversity of investments which in turn reduces your risk by spreading the risk across different asset classes.

What should I be thinking about?

• You will need to apply for an investment line of credit to enable this strategy. Any change to your debt provisions are subject to approval by your lender.
• Interest rates on investment lines of credit are higher than other loans such as your mortgage. This increases the cost of borrowing.
• Just as having an increased portfolio size can magnify your gains, they can also magnify your losses when the markets go down. Volatility in your portfolio will be higher. It is important that you are comfortable with this. A minimum of 7 years is recommended for this type of strategy.
• Interest rates are subject to change. This will impact your cash flow.
• Debt recycling requires regular review to draw down on debt and invest these funds for your wealth creation strategy.

This information is of a general nature. It does not consider your personal objectives, needs or situation. It does not represent legal, tax or personal advice and should not be taken as such. If it has been provided to you with a Statement of Advice (SoA), you should rely on the personal advice in the SoA.

Care has been taken to provide up to date and accurate information relating to the subject area however BR Advice Pty Ltd (ABN 30 612 056 523, AFSL 488655), Blue Rock Private Wealth Pty Ltd (ABN 95 166 927 055, AFSL 452733), Blue Rock Private Wealth (Melb) Pty Ltd (ABN 48 652 202 698, ASIC AFS No. 1298365) and their representatives make no representation as to its accuracy or completeness.

Published: September 2022.

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