Debt Recycling Questions

Hi guys,

I understand the concept of debt recycling when you have a PPoR, highlighted by the way Thornhill presents it in his Motivated Money book. However, I am struggling to get my head around three things.

1. Do all dividends go towards PPoR debt? And if so, do you pay the line of credit loan (which is now deductible) out of your own cash flow from your work income (which would reduce any extra contributions you make to the loan anyway) or do you let it just capitalise? If you pay dividend income towards the line of credit loan first, there is likely to be not much extra going towards your PPoR loan?
2. Does debt recycling only work when interest rates are low? If your dividends amount to 4.5% (6.4% grossed up) and interest rates are say 7%, wouldn’t you be better just putting it in the offset as you get a greater return?
3. If you say pull out $100k, do you use all 100K towards shares/LICs/ETFs or should you keep say 30% sitting in an offset and don’t touch?

These may be questions for @Terry_w @Rolf Latham @Jack Chen @JK200SX

Thanks in advance.

 

1. You would be borrowing to invest. If you don't pay the interest on this loan you would be capitalising the interest. You need tax advice in this regard.

2. don't forget franking credits and capital growth.

3. that is a personal decision. If you are borrowing money you should only be borrowing the amount you will use. Avoid parking in offset accounts.

 

Hi @Terry_w thanks for the reply.

I would want to avoid capitalising interest as it only increases the loan against the shares. In that case, would it be best to direct dividend income towards line of credit first before paying into PPoR loan?

 

No. You would be paying down the deductible loan if you did this.

I would direct dividend income to the offset account and have the LOC interest paid once per month from this account too.

 

Thanks Terry. To get my head around it, does the attached look correct? Direct all income including salary, bonuses, dividends to the offset against the PPoR loan and have the LOC interest taken out of the offset monthly. Would you then pay beyond the normal P&I repayment into the loan or keep in offset?

 

Not sure it is correct with all of those arrows.

It is really simple. You are just borrowing to buy something that brings in income. same as buying a house and renting it. rent into the offset and pay the interest with the offset.

 

Thanks Terry, I think I am just over complicating it. One other thing though - the dividends you put straight into the offset but do you keep it there or pay into PPoR loan eventually so you can then use to borrow more shares? Thanks

 

Depends on your strategy. I would not pay down the loan until you are going to borrow the money. if your strategy is to wait and buy shares in $20k lot hits then save up $20k (and buffer) in offset, then split the loan, pay it down to $1 and reborrow to invest.

This where the simple loan split strategy can work well if your lender doesn't split loans easily

Tax Tip 13: Simple Loan Structuring Strategy https://propertychat.com.au/community/threads/tax-tip-13-simple-loan-structuring-strategy.2601/

 

Awesome thanks Terry I'll have a read of the link. Appreciate your help

 

Hi Terry, by 'reborrow' do you mean redraw the prepayments ?

 

I just shred my paper loan statements and toss them in the yellow-lid bin .. does that count as debt recycling??

 

Yep! Make sure you transfer the funds directly to where they need to go so they don't get mixed wth cash in the interim. A good paper trail is important!

 

Yes, redrawing is reborrowing.

 

Is this strategy only useful if you’ve paid down the PPOR debt and then have that portion available to redraw as LOC for income producing shares? As opposed to a newly acquired PPOR that has increased in value and therefore has equity available, but little of the loan paid down?


Our situation is PPOR loan $880k, Land+Build - $1.05m – 84% LVR. Recent bank val $1.15m. So $100k increase (only portion of which available as equity to keep LVR under 80%). Given we haven’t paid much of loan down as it was only completed Dec 2016, if we pulled say $30k equity out to buy ETF/LIC's, we would be increasing the debt in the first instance, not reducing it.

Do we need to wait until a decent amount has been paid off the loan before commencing a debt recycling strategy? So as to keep current debt levels the same.

 

Hi @Terry_w does debt recycling only work when PPoR loan is interest only?

If it's P&I, once you paid down and re borrowed a split to invest, wouldn't that split be P&I too? not ideal as you are paying down deductible debt when you have non-deductible debt.

 

Nope, it works when PI too, but any new split would be PI too unless you changed it.

 

Ok thanks @Terry_w. Is it possible to have the new split as IO though? say for example AMP's Master Facility?

 

Yes

 

Awesome thanks @Terry_w

 

Hi All,

Thanks for sharing your expertise, extremely educational and helpful.

Is it possible to debt recycle against your PPOR (in individual/joint names) and use the borrowed funds to buy the investment ie shares within a discretionary family trust if the property is not owned within the trust?

As a follow on from above, if the trust receives dividends on its investments, can these be directed back to the offset account against the LOC loan on the PPOR? I assume this would not be possible but I'm certainly no expert. Hoping @Terry_w, @Rolf Latham, @Corey Batt and others can shed some light for me.

Thanks in advance.