Debt Recycling Guides & Examples

A couple of recent guides I've seen out there

The Most Exhaustive and Comprehensive Guide to Debt Recycling

The Firenance Guy

The Ultimate Guide to Debt Recycling (2021 Updated and Revised)

Strong Money Australia

Debt recycling: A step by step guide to smashing debt & building passive income.



Family Finance



GPS wealth







ATO Debt Recycling & Refinancing Query

 

are any licensed to give tax advice?

 

Perhaps somebody can help me with a related question. Most of the debt recycling guides I've read use a PPOR with an existing mortgage as an example. But what if the PPOR is already fully paid off? Assuming the owner has enough income to service a mortgage, can they restart the process by releasing equity and then using the proceeds to invest in shares?

 

Then what is there to recycle?

Borrowing to invest is a different, but related, strategy

Tax Tip 219: Debt Recycling v Borrowing Extra to Invest
Tax Tip 219: Debt Recycling v Borrowing Extra to Invest

 

How They Plan to Pay Off Thier 30 Year Home Mortgage Faster and in 10 Years Thanks To Debt Recycling

 

I’m interested to know if a debt recycling strategy becomes less effective as interest rates fall?

 

It does. But it's still free money

 

True but also changes the risk/reward balance.
@Terry_w would you generally recommend ETFs for debt recycling or individual stocks?

 

I don't advise people on what to invest in

 

Let me rephrase… do you find most people use ETFs or individual stocks for debt recycling?

 

I don't ask them to be honest. It is not something that concerns me. I just make sure that they expect to receive dividends.

 

I personally think using large amounts of housing debt to put into ETFs an shares quite dangerous. If you must keep the LVR low. As last year has proven the market can drop 30% quickly...it recovered but in 2008 it it took years. Lots people including finance types assumed a 30% hit... It went over and too many years to recover.

People are punch drunk about values in Sydney....lots of people sitting on $4m home with say 1.5k debt then increase their borrowings via an equity line an to say 2.5m. Some dumping $1m into shares....or another Sydney property. What happens if there is a 30,% correction. My broker is telling me a lot of these people are in their mid 40s to 50s. Interesting times.

The only debt recycling I am doing is security swapping asset sales to another property or land. Recently bought a block of land for 177k... from the sales of a place in Adelaide. I bought it for 180k.. sold 353k. Pocketed 160k and the loan of 185k was swapped out for the land. Bank valued the land at 230k. Will build on it using cash and then swap another mortgage onto it when it is finished. I expect the place to be worth 650kbplus...on completion will spend 225k for the build...safe market not Sydney or Melbourne

 

You don't need a license to describe a process or share a personal experience or opinion.
Otherwise everyone here would need one.

Specifically saying "pay me and I'll show you how to" may be different as is "Do this and that to make millions".
I would also add "get my ebook that shows you how to retire early" but there seems to be much grey area and they will invariably have a standard disclosure.

 

debt recycling is a tax strategy afterall - converting non-deductible debt into deductible. I see a lot who stuff it up because of bad 'advice' from podcasts, brokers and forum posts. One was just using cash from an offset account to recycle!

 

No argument there, my accountant has been a huge asset over 30yrs.
Peeps just gonna do silly things regardless.
The stuff I see on my FB feed...it's just not worth correcting or arguing about.

 

Perhaps....the first step would be to be very clear what you mean by debt recycling.

To me ....using money you have is silly....but if you sell an asset which has made money and then repurpose that debt..that to me is debt recycling.

By the way....one does not need a license to discuss tax matters..as it is implied in this forum people need to get independent advice to customize anything to their circumstances. Though I do see the odd village idiot...who asks you questions.....those ones are too tight to get customized advice and end up shooting themselves in the foot.

The best one I heard was people who self insure landlords their properties and only have building insurance. I raised what happens if it becomes Meth house and you have fix to re-rent it...it went over their heads...

 

For nearly 30 years I've borrowed against the PPOR to invest in shares and property. The dollar amounts and LVR were and are relatively modest, easily covered by cashflow. While it was a bit tight during the GFC and last year, due to a cash reserve and cashflow planning I survived. Debt recycling was never considered, may not have even existed then.

Some advice is contrary to my view, like this Debt Recycling: What Is It And Why Do It? | Blueprint Wealth
Bad debt is "Debt that you have used to purchase the home you live in". While there are no tax deductions for PPOR mortgage, I have always regarded a PPOR mortgage as good - it gives security for an asset that will in due course be owned and which is hopefully appreciating. Owning the PPOR in retirement is a huge boost for financial survival.

This Reduce, Reuse = Debt Recycle | Income Solutions says "As you reduce your mortgage, you increase your investment debt to purchase additional investments." I'm very selective about what I buy and when, Buying at market lows has served me well ... mostly.

Peter Lynch quoted St Agnes students: before investing you need to be able to explain it with a crayon. There's also the sleep at night aspect. I'm comfortable with a small PPOR mortgage and no other debt. If it was not for the pandemic the mortgage would be lower, no matter.

 

I am trying to understand if debt recycling works for me.

I just bought a house with 20% deposit (settlement due by end of this month). I still have some leftover (around 10%) which I was planning to put in offset and save interest on it.

Recently someone suggested Debt Recycling where I put 10% in the mortgage and get a Line of credit for that 10% to invest in shares/ETFs etc. The interest payment on the 10% will be tax-deductible but my question is cant I just invest the 10% amount directly, without going through the bank at all?

Why would I pay interest, albeit reduced? This is also applicable to all extra payments towards mortgage. Not sure what am I missing here.

 

if you had a $100,000 loan with $10,000 cash in an offset account you would be paying interest on $90,000 right.

if you removed the $10,000 you would be paying interest on $100,000.

if you debt recycled $10,000 into an income producing investment you would be paying interest on $100,000 but the interest on $10,000 of that would be deductible.

Instead if you just invested the $10,000 in your offset account you would be paying interest on $100,000 with none of it being deductible.

This is why some say that debt recycling reduces risk, because you are saving tax and getting more money in your pocket than if you did not debt recycle.
Tax Tip 345: How Debt Recycling Reduces Risk Tax Tip 345: How Debt Recycling Reduces Risk

 

Thanks a lot, Terry_w, for your prompt reply. sorry still confused, so let me explain with an example.

------
With debt recycling : (Investment : $10000 , Loan Loan : 2%, Investment return : 6%)
Taxable yearly return => $600 ( 6% profit) - $200 (Bank Interest) = $400
-----------
Direct Investment : (Investment : $10000 , Investment return : 6%)
Taxable yearly return => $600 ( 6% profit) = $600

By the look of the above calculations, debt recycling is not beneficial.