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Debt recycling - is it worth it?

Discussion in 'Property Finance' started by ps0104, 9th Nov, 2015.

  1. ps0104

    ps0104 Member

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    Hi there

    Situation is as follows:
    - PPOR valued at 460k with a 335k loan at 4.24%
    - 55k in a 100% offset arrangement
    - Currently double income, able to save approx. $1500 fortnight
    - Expect to be on single income within next year or two, savings capacity will likely reduce to around $400 fortnight.

    I recently saw a financial adviser and their suggestion was that I use the $55k in offset to commence a debt recycling strategy, investing in a managed fund. The intent would be that in 10-odd years I end up with $0 non-deductible debt, $335k deductible debt and a managed fund worth (hopefully) much more than $335k.

    My question is:
    Is it worth it? A debt recycling strategy is going to cost me $2500 to set up and then about $1500 per year to maintain. Are the returns likely to offset the costs?

    Currently I'm getting an effective return of 4.25% tax free from the offset. Surely pumping all the savings into the offset will likely have a similar impact once the fees are taken into account?

    Is the adviser sending me down the garden path or is this an important first step to be taking given I have multiple decades left until retirement and no other investments other than super? I know that a comprehensive answer can only be provided with tailored advice, but I'm particularly interested in the views out there on debt recycling.

    Thanks in advance

    p.s. On a similar note, can anybody recommend an adviser in SE QLD to get a second opinion from?
     
    Last edited: 9th Nov, 2015
  2. D.T.

    D.T. Adelaide Property Manager Business Member

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    Really not sure what you mean by this bit, how is funds in your offset account also earning interest? The payable interest is meant to match your loan interest, net being 0% (but saving you heaps of interest)

    I prefer to recycle in a different way - pay that $50K into the loan itself, then extract it back out in the form of equity. You could then spend it on an IP deposit, with the interest on the $50 being tax deductible.
     
  3. neK

    neK Well-Known Member

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    This sounds interesting. Care to explain how this works? Your loan is offset and you get 2.75%?
    What if you had 335k in that offset. You would 0% interest on your loan and earn 2.75% on the money? Sounds rather odd.
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    you either misunderstood or the advisor is a fool. Taking money from the offset account will lead to non deductible interest being incurred on your home loan.

    It would be far better to borrow rather than use the offset money. $50k x 4% = $2,000 in extra deductions each year doing it this way. If implemented that advice would cost you about $1000 per year plus all the fees.

    The fees are also very hefty. that is about 3% per year to maintain and 5% set up costs. If you get a 4% return you would be going backwards.

    Hope you didn't pay for the advice.
     
    neK likes this.
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  6. ps0104

    ps0104 Member

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    Interesting. You have just made me dig into this a bit deeper. What I'm talking about is flexi rates with Suncorp. I found it hard to believe too - which is why I asked three different bank employees (at two different branches) and all three said very clearly that the interest payable on the offset account is on top of the interest being offset (i.e. both occur concurrently).I've found in the fine print that it is not quite that simple and any amount put into a flexi rate is no longer offset. It seems I should have trusted my original instinct. I'll update the original thread.
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Sounds like it is not an offset account.
     
  8. ps0104

    ps0104 Member

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    Thanks Terry. I should clarify that when I say 'using' the 55k the adviser is talking about paying that into the PPOR loan and then re-borrowing in a separate loan for investment purposes.

    I didn't pay for the advice. I was ready to sign up and get it done up as a formal SOA but something in my gut was telling me not to...
     
    Perthguy likes this.
  9. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    On paper debt recycling strategies work quite well. You pay off your non deductible debt faster, whilst investing in valuable assets.

    As Terry suggested however, you've got to outperform the cost of the money borrowed as well as the cost of the advice. Based on the figures you're quoted, the yield is probably going to have to be about 8% on the investment the advisor is recommending.

    That sort of investment can be fairly hard to find.
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    That is a bit better, but the fees are too high for the amount. Probably fair fees - but just that you have not enough.
     
  11. ps0104

    ps0104 Member

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    That is what has been worrying me. Is it the case that it is something to look at when there is 100k or 150k in the offset or is it simply not viable against a relatively small loan?
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Very liable - but do you need the advice?
     
  13. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    lawyerdian slip :)

    Viable perhaps

    ta
    rolf
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    ha ha! yep viable!