Transforming Inefficient Loans Into Wealth Boosting Investments
Accelerate Your Wealth With Debt Recycling
Traditionally, the so-called sensible advice was always to pay off your home loan first — and then consider using any surplus funds for investment.
However, while not only leading to tax inefficiencies, this customary guidance ignores the tough current home loan market conditions. Restricted lending, high deposit requirements, and elevated property values — factors that mean today, people borrow later and pay back longer.
Therefore, leaving little time for future investments to grow.
At ATB Wealth Strategies, our specialist financial advisors will work with you to create a formidable strategy — permitting you to pay off your home loan, while also saving money and creating powerful investment pathways.
You’re Not Being Tax Efficient — Let ATB Wealth Grow Your Income With Debt Recycling Today
Debt Recycling Strategy — Good Debt vs Bad Debt
When discussing Debt Recycling, the terms good and bad debt are frequently used. This can be slightly misleading, as debts aren’t usually inherently good or bad.
However, they can be tax efficient — what the good refers to — and tax-inefficient — the bad (note that this has no relevance at all to good and bad debt descriptions in accounting, where it indicates the likelihood of a debt being repaid to the lender).
And, unless you have already taken proactive moves, your home loan is, theoretically, a bad debt.
When you make your monthly payments on your mortgage, it’s most likely on a principal and interest basis.
The principal part pays a little off the funds you borrowed to pay for your property — as each month passes, the equity you own in your home increases. Which, naturally, is excellent news for you and your family.
The interest component, however, does nothing else but service the bank or financial institution that provided the loan. You will never see this cash again, or receive any benefit from it.
That’s because home loan interest is not a tax-deductible expense. However, interest on loans used for investment purposes — such as shares or an ETF (Exchange-Traded Fund) — is deductible.
So, if you could somehow transform a home loan into an investment loan — you can reap the advantages of paying off your property and enjoying relief on the interest payment — that is the basis behind Debt Recycling.
Recycling Your Debt With Leverage
Debt Recycling involves leverage — a term that describes borrowing cash to purchase an investment, with the intention of the returns on the investment exceeding the cost of the original debt.
When recycling your home loan to create tax efficiencies, the process usually works like this:
- Using the equity already held in your home as security — you take out an investment loan, i.e. levering.
- You use the funds from this loan to purchase investments — this could be shares, ETFs, or a rental property.
- The monies generated by the investment(s) — dividends, refunds, franking credits, rental income etc. — first pay the investment loan interest, and the surplus is utilised to reduce your home loan.
This enables you to enjoy tax-deductible interest payments (on the investment loan), and establish a long-term investment portfolio, while continually paying off your mortgage.
And, depending on your life plans and aspirations, you can repeat this process. As the equity in your home rises (as the home loan decreases), you can draw down further monies to create a larger investment portfolio and increase your growth returns.
The key behind leverage and Debt Recycling — you’re releasing equity from assets with bad debts to create good debts that generate income.
Lever Your Home Today To Accelerate Your Wealth
Tax Deductible Means Saving You Money
Whether employed or self-employed, over a certain limit, you pay tax on your income.
And, depending on the nature of your employment or business, there are certain allowable deductions that you can make from your gross income — reducing your tax liability. That is, they are tax deductible. For example, work uniforms, travel expenses, or tools.
Yet, day-to-day expenses, such as mortgages for your family home, are not deductible — as they aren’t costs directly associated with your work or income.
However, if you take an investment loan, the interest charged is connected to the returns achieved from your portfolio — therefore meaning the interest is deductible, and can be offset against any due tax on the generated income.
So, your mortgage isn’t tax efficient, your investment loan is.
Through Debt Recycling, the plan is to pay off the inefficient home loan quickly — while taking advantage of the efficient investment loan.
This results in money savings and cash growth — continually reducing the compound interest on the home loan, elevating property equity, and permitting even more leverage.
You have recycled a theoretical bad debt into a good debt — without changing your overall liability.
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Debt Recycling Strategy Benefits
Debt Recycling offers different benefits depending on your income, overall plans, goals and individual situation. This type of strategy can lead to:
Building an Investment Portfolio Sooner
Many people don’t start building an investment portfolio until they finish paying their mortgage, or find they have more disposable income to do so. Debt Recycling can help you get started on building your assets faster and sooner.
If you think about how long it would take to pay off your home loan, you can see that many opportunities to invest might have passed you by. Compounding your earnings in this way, can help you achieve the financial goals you dream of and offer a brighter future for you and your loved ones.
As explained above, recycling inefficient home loan debt into a tax-efficient investment loan provides welcome cost savings.
It’s a continuous cycle that can see you own your home outright faster than you thought possible. As the amount of debt owed on your home lessens, the amount of equity you can borrow against it to invest increases — earning more tax-deductible income.
In essence, it’s moving a non-tax deductible debt balance into a tax-deductible loan. And, the higher your marginal tax rate (the amount of extra tax you pay for every dollar you earn), the greater the savings.
Creating Diverse Investment Opportunities
Traditional investment strategies sometimes lock you into one type of asset, generally property, preventing you from diversifying an investment portfolio. By employing a Debt Recycling strategy, you can free up funds to invest in shares or other assets and build a varied portfolio earlier.
You can spread your wealth across different sectors and asset types, helping protect your investment if any part of the market takes a downturn — and compound your return.
Let ATB Wealth Guide You Through Your Personal Benefits of Debt Recycling — Talk to Us Today
The Downsides of Recycling Your Debt
As with many investments, there is an element of risk involved in Debt Recycling. The value of your investments can drop as well as increase, and you need to be able to weather the storm if this happens.
The main risks involved with Debt Recycling are:
- Investments performing poorly: If the market drops and you aren’t achieving the expected return on your investment, you still have a loan to repay — and possibly no funds coming from these assets to help with this.
- Increased debt on your primary residence: Managing the repayments on the loans can leave you feeling overwhelmed — especially if you miss or default on any payments. It could put your home at risk.
- Changing costs: Interest rates can rise, meaning that Debt Recycling could cost you more, and don’t forget any associated fees for brokers, etc.
By seeking advice from one of ATB Wealth’s expert financial advisors, you can get the whole picture and minimise the risk. We would review your income, expenses, current assets, and debt to ensure you fully capitalise from this strategy.
Allow ATB Wealth To Discover if Debt Recycling Is Suitable for Your Circumstances
Debt Recycling ATO — Their Position and Legality Their Position and Legality
Recycling Debt isn’t illegal.
It’s not an elaborate or convoluted tax-avoidance system designed to hide income, camouflage liability, or confuse the ATO with impenetrable layers of complexity.
Instead of simply repaying a home loan, you’re actively contributing to the driving force of the Australian economy — investment.
Furthermore, as your returns, portfolio, and wealth grow, you will probably be paying more in tax to the ATO than you would otherwise — although at a more efficient tax rate.
Let ATB Wealth Guide You Through Your Personal Benefits of Debt Recycling — Talk to Us Today
Can Anyone Debt Recycle?
We’ve previously mentioned that a Debt Recycling strategy might not be for everyone. There are a few points you should consider:
- You must have equity in your home that you can borrow against, and a home loan to recycle.
- It’s a good idea to have other income that isn’t incorporated into your Debt Recycling strategy. Should your investment income or dividends fall short of your home loan interest repayments, you will still be able to cover them.
- Be prepared to take a risk and ride out the bad times if the market drops on your investment.
- You need to be in it for the long haul. This isn’t a short-term process and is only effective if you have around seven years to invest in this strategy.
ATB Wealth — Turning a Negative into a Positive
Pay off your home loan, gain tax efficiencies, and forge a powerful investment portfolio — let ATB Wealth Strategies show you the way.
Working together, we can explore whether recycling debt is suitable for your situation, the possible benefits you will achieve, and the reassurance and security you can gain from a long-term plan.
Creating tailored pathways that meet your risk exposure, aspirations, and needs — our professional and amiable advisors will deliver honest, independent advice without ties or affiliations to products or services.
Permit ATB Wealth Strategies to take you from bad to good — with Debt Recycling.