Debt Recycling, no current deductibe debt

Discussion in 'Share Investing Strategies, Theories & Education' started by dmb1978, 7th Mar, 2017.

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  1. dmb1978

    dmb1978 Well-Known Member

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    Apologies for typo in heading - I can't edit it.

    I have finally got my head around the debt recycling and keen on LIC's. Sorry another post about LIC's.

    We currently don't have any deductible debt, but our latest IP will become our PPOR in a year or three with a large mortgage. There is next to no equity at this stage with a LVR of 80%

    I want to start building a share portfolio of LIC's. Is it worth getting the head start using the debt recycling method (LOC etc). Or would it be easier to just start purchasing the LIC's, DRP or feed dividends into I/P offset account until it becomes a PPOR and then use a LOC?

    Alternatively, is it best to wait and just leave all the money in the offset and buy the LIC's later?
     
  2. Ross Forrester

    Ross Forrester Well-Known Member

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    A lot of the answer depends on what you want to achieve.

    However if you have a goal of overall debt reduction I would suggest you pay down the home mortgage first. The dividends would be a good source of income to help with that.

    If you go a DRP you are effectively saying that the dividends will get a return higher than the after tax cost of interest in the mortgage. The mortgage will not go down.
     
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  3. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    You're suggesting that whilst you don't have non-deductible debt now, but you will have at some point in the future...

    Debt recycling is essentially paying off some debt to create equity, then borrowing that equity back to invest. Normally the debt being paid down is non-deductible, but it doesn't have to be.

    You could pay down the debt on the IP, then borrow against the equity for the LIC's. This essentially recycles the debt from the purpose of purchasing the IP, to the purpose of purchasing the LIC's. When you move into the property, you'll minimise your non-deductible debt at that point.


    It hasn't been mentioned specifically, but do you currently own your own home or are you renting? If you own your own home you could borrow against that property to invest. From there you can use the dividends and capital gains from those investments to pay down the debt on the IP. This would accelerate the process significantly (assuming you make a profit on the LIC's).
     
  4. dmb1978

    dmb1978 Well-Known Member

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    Thanks Ross and Peter. I want to build an income with LIC's aswell as use it to pay down the future PPOR (current IP).

    We are not currently renting and have no other PPOR, only what we bought recently which is currently an IP. As we can't live in it for a while, was just looking at which strategy would be best to get ahead.

    Also the IP is I/O so we aren't paying down the loan just using the 100% offset at this stage.
     
  5. Chris Au

    Chris Au Well-Known Member

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    Hi @dmb1978

    Great question. To fill any lazy afternoons, as well as comments here, there are other posts in the Accounting and Finance sections that may interest you around debt recycling -

    Strategy: Using AMP’s Master Facility to Debt Recycle

    debt recycling pro's and con's

    Debt recycling by loaning money. Is it possible?

    Debt Recycling with IP's

    New IP or debt recycle?

    Debt recycling - is it worth it?

    Advice re debt recycling and security

    A thought around getting a broad range of comments on the topic, then apply it to your situation. I entered debt recycle into the search engine.
     
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  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes definitely start structuring for debt recycling now.
     
  7. Chris Au

    Chris Au Well-Known Member

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    I'm moving off thread a little to as @Terry_w about structuring and debt recycling -

    if you have your PPoR/IPs etc in your own name, and these will be the assets you debt recycle against, can you use these funds to purchase shares etc under a trust structure, or must the asset your debt recycling against be in the same structure that you are buying the next assets under (apologies for the confusingly worded qstn... :confused:).
     
  8. Ross Forrester

    Ross Forrester Well-Known Member

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    Yes you can. The asset does not have to be the same but make sure you do not incur a net loss in the trust.

    The security used for a loan does not affect the tax deduction for the interest.
     
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  9. Chris Au

    Chris Au Well-Known Member

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  10. dmb1978

    dmb1978 Well-Known Member

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    Thanks Terry_w, As the IP/PPOR is mainly in my husbands name as far as tax goes, if we get the line of credit and buy the, LIC's, do they have to be bought in his name or can they be bought in mine for the LOC interest to be fully tax deductible?
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    He could borrow and on lend to you and you claim the interest.
     
  12. dmb1978

    dmb1978 Well-Known Member

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    Thanks Terry_w, i'm not earning any money at the moment so I guess it would have to be bought in his name to get the benefit of the tax deduction. Or do the sums and see of the initial tax free dividends are worth more than the deductible interest.
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Consider cgt too.

    This could allow for a good debt recycling strategy.
     
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