Debt recycle or free money

I am in a situation where I am about to buy a PPOR and I am torn between which borrowed money path I should take going forward.


Path 1: get a LOC loan (roughly 5% interest) and debt recycle into LIC/index funds (or get a normal loan with multiple splits to lower interest rate, but then leave the redraw option in the hands of the bank)


Path 2: as I am a serving defence member I have the option of using an assistance scheme that pays $250 a month into your home loan (roughly 4%) which using an extra repayment calculator would have it payed off after about 21 years provided no interest rate/assistance amount changes.

While that’s working it’s magic just continue investing as normal with any available funds.


Path 3: same as path two but use the assistance money to decrease my contribution and use increased cash flow to invest, leaving the loan at 30 years non deductible. Side note, unsure if this is allowed using the scheme and would have to find out before taking this approach.

Points to consider:
-Borrowed money will be approx 300k due to location.
-I believe eligible for FHOG but that doesn’t matter anyway because in WA it is now only for new properties from what I’ve read.
-Median wage DI NK for the next few years


Not asking for any advice, just looking for some different opinions as I have gone back and forth in my head for a while between the options

Many thanks in advance

 

Hi. Can I suggest that you add some further information to make things a little clearer?

How much deposit/savings do you have?
What are the conditions on the defense force
Assistance payment scheme?
How much “extra” that the minimum repayments would you be able to put into the loan payments?

A classic debt recycling scheme would have you taking out a loan that has some sort of global borrowing limit. A decent broker would be able to tell you which loan products are suitable for this.

To start with you would have two splits:

$300,000 balance for the PPOR (P&I)
$0 for shares/income producing investments (possibly IO if the rate wasn’t substantially higher than a P&I loan)

Then make as many additional repayments in the PPOR split as you can, and then redraw from the shares/income split to buy income/producing shares. Then all income from the shares/investments can be paid on to the PPOR split.

Rinse and repeat. With increasing speed the PPOR loan will shrink.

Regards,

Jason

 

I did some googling and it seems if you use the DHOAS (which is what I presume you are talking about) then you are restricted to loans from one of:

They are:

• Australian Military Bank
• Defence Bank Limited (Defence Bank)
• National Australia Bank (NAB)

Maybe one of the brokers can comment in how suitable they are for a debt recycling setup?

Regards,

Jason

 

Ok, without knowing deposit amount, intended loan size etc. it's difficult to comment other than the DHOAS entitlement bit.....

So you're eligible for ~$3k /yr in tax free assisted benefits against a PPOR mortgage at ~4% and you're contemplating not accessing that.... Why?

Are you considering leaving the ADF or otherwise don't have a large residual DHOAS entitlement? Have you worked out the grossed up value of the DHOAS payments?

 

Sounds like you can do both.
Avoid using a LOC as your main loan. Split your loan into multiple splits and pay one split down, redraw and invest and claim the interest.
Tax Tip 13: Simple Loan Structuring Strategy Tax Tip 13: Simple Loan Structuring Strategy

 

Thank you for your reply.

Deposit will be 20%
A couple of months after purchase I will receive roughly 60k from a small apartment sale.

There are a lot of conditions to it, the main ones being that I stay in defence and I have to live in the house, the money that they deposit can not be withdrawn from the home loan, and it must be one of the approved home loans as @JasonC stated.

I’m well aware of the debt recycling process, just trying to decide between that or the DHOAS program.

 

See above for additional loan information

Contemplating it because would it be better to debt recycle and have no non deductible debt within a shorter time period.

Not considering leaving and don’t have a lot of residual DHOAS credit but provided I don’t get out of defence or take leave without pay (not going to happen) that won’t be an issue anyway.

Unsure on what you mean by grossed up DHOAS payments

Thanks.

 

That was my original intention after reading your tax tips a while back but on closer inspection of the DHOAS terms it appears the terms will be voided by redrawing for any purpose other than reasons directly related to the home.

I will try find the exact condition in a few days when I have a better connection.

Thanks

 

DHOAS = tax free $$$ into loan account regardless of amount owing & even if 100% offset, as long as it's not payed out....

Investment income is taxed at your marginal rate (probably 37% in your case) which reduces your net $$$.....

So to compare the two you either need to gross up DHOAS to an equivalent taxable income amount or ensure you use only forecast Net investment income, which is rather more difficult..... make sense now?

 

Okay I think I understand now. I’ll have to do some more figures. But it’s definti leaning towards the free money side of the debate haha.

I also didn’t even think about the possibility of offset, not sure how that skipped my mind.

Also to add to the debt recycle inside of DHOAS part of talks I found this on the website, it’s not the full terms of it that I read the other day but the description sums it up well.

Use of DHOAS home loan
DHOAS home loans must be secured by the subsidised property and can only be used for buying a home, buying land, building a home, renovating or extending your home, or refinancing a loan for one of these purposes.

You cannot use funds gained from a DHOAS home loan to buy investment properties, cars, boats, holidays or for other purposes. For this reason, no lines-of-credit are available on DHOAS mortgage products.

DHOAS subsidy is not payable if any part of the interest in the land purchased using a DHOAS loan is held as a trustee or as a beneficiary of a trust.

 

Pointing out that if you pay extra onto your mortgage and have a redraw facility, you can withdraw up to that excess amount for use however you see fit - doesn't have to go back towards the house. I know you're probably aiming for minimum repayments anyways but I thought I'd add this for fullness.