Debt Recycling

How It Works and Can Benefit Your Wealth Strategy

Debt Recycling: How It Works and Can Benefit Your Wealth Strategy

Maybe you’ve already heard of debt recycling, sometimes called mortgage recycling, yet you aren’t entirely sure what it is? Or it could be you understand the bare bones of it but need more help. Either way, here at ATB Wealth Strategies, our experienced financial advisors can delve further into the detail of securing your financial future by helping reduce bad debt.

We look at the whole picture of your finances and liaise closely with you to find out where you can improve investment and income so they work for you.

Essentially, debt recycling helps repurpose loans that aren’t working for you into ones that do. Good debts could be assets you’re holding that can increase your wealth over time — and which you can use to reduce your tax liability. On the other hand, bad debts won’t attract any tax-deductibility and aren’t usually secured on assets you’ve identified to grow and increase your wealth — generally a loan secured against your home.

So getting down to basics, debt recycling involves releasing equity from assets on which bad debt is owed to invest and generate income. This income can then be utilised to reduce the non-tax-deductible bad debt. The cycle repeats as your ‘bad’ loan reduces, giving you more equity to borrow against and invest.

In this guide, we reveal all you need to know about debt recycling, the pros and cons, and how it can help as part of a financial plan. However, if you want advice on how debt recycling fits into your wealth plan, speak to our financial planners at ATB Wealth Strategies now.

If you want advice on how debt recycling fits into your wealth plan, speak to our financial planners at ATB Wealth Strategies now.

Debt Recycling: What Is It?

In a nutshell, debt recycling turns bad debt, i.e. those for non-investment purposes, into good debt — offering tax benefits and helping to create wealth. It’s a way to get your money working harder so your future can look brighter.

Equity in your property is used to raise funds you can utilise to buy an asset that produces a tax-deductible income. The income from this asset is then used to pay off your mortgage, reducing non-tax-deductible debt.

Granted, it can appear that you’re just trading in one loan for another, but debt recycling can reduce your tax bill, especially if your income is on the higher side.

There is a level of risk associated with this type of wealth strategy as you will essentially have two loans possibly secured on your main residence — this may be outside the comfort zone of some people. It can help enhance the benefits of investing, increasing your wealth more efficiently and in a faster timescale, but if the market takes a downturn, your risks are also increased.

At ATB Wealth, we will assess your risk tolerance and determine if debt recycling is the right strategy for you. We understand that each set of financial circumstances and each individual is unique — and will tailor your wealth plan according to what you need and what you’re comfortable with.

At ATB Wealth, we will assess your risk tolerance and determine if debt recycling is the right strategy for you.

The Debt Recycling 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.

Tax Savings

Debt recycling offers considerable tax benefits. It’s centred around maximising your tax benefits and helping minimise your tax liabilities — the more you earn, the more advantageous this can be.

This is a strategy that turns home loan repayments (non-tax-deductible debt) into an investment income with tax benefits — which you then use to reduce your mortgage.

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.

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.

Debt Recycling: The Downsides

As with many investments, there is an element of risk involved in debt recycling. Hence, if you prefer to err on the side of caution with your finances, it may not be the best strategy for you. 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 in a nutshell are:

Debt Recycling Australia
    • 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. We can help you gain an all-round understanding of how debt recycling could fit into your wealth plan for a secure financial future.

What Are the Long Term Goals of Debt Recycling?

Debt recycling entails using debt to create funds for investment. You don’t actually increase your overall debt — you repurpose some of your current debt. Over time, you accumulate more cash — after paying your taxes — than you would if you continued to repay your home loan in the traditional way.

The extra money you pay off your mortgage can be released to increase your investment portfolio. The ultimate aim is to pay off your home loan faster and build up your assets for the future.

Bear in mind, you need to have your mortgage loan set up to repay principal and interest. If your loan is interest-only, your debt will remain the same.

Debt Recycling & ATO

You might be wondering whether debt recycling is legal? In short, yes it is. There are several posts on the ATO’s community forum in which they’ve participated and offered advice, so it would appear the organisation has no issues with this tax-saving strategy.

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 take into account before you even begin.

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.

Debt Recycling: Is It For You?

Maybe you’re considering whether debt recycling is the route you want to take. Before you make your decision, talk to one of our expert financial advisors who can help outline the pros and cons for your individual circumstances.

Debt recycling could help you build a more secure financial future, so speak to us at ATB Wealth Strategies today.