Debt recycling strategy - Please critique

Hi all,

After some feedback on my strategy. Particularly from those who have done something similar.

Here are the details:

Current PPOR loan: $390,000
Home value: $760,000 approx

THE PLAN:
- refinance home loan to product with a LOC (looking at State Custodians - 3.93%)
- Borrow total of $608,000 made up of $218,000 LOC and $390,000 I/O PPOR loan (with loan split into 5 portions)
- Invest LOC money into dividend paying LIC shares
- Pay down other splits and once they are paid down, redraw and also invest them.

Ultimate goal: Pay off PPOR loan in 7-8 years.

I guess after the interest only period is up (5 years), I will either have to revert to P&I or refinance again.

FYI: Before anyone mentions it, I have already read through Terry's debt recycling tips.

Feedback? Has anyone used State Custodians for this strategy before?

Thanks in advance,

Bryce.

 

Given it is your PPOR. The only point I would suggest is that you are sufficiently diversified and have provisions in place to handle investment volatility and other risks. Equities have a longer term investment horizon so imagine a very worst case and you are under water (capital value and dividends) for a couple of years before it comes back. You would definately want to be able to ride that out.

 

Sounds alright from a tax perspective but what about the offset account?

 

Dunno if it's important to you, but State Custodian's online portal looks like *expletive*.
When I used them a year ago they didn't have very good security features (like 2-factor authentication, or SMS alerts). I'm not sure how friendly it'll be when you have 6 (or 7) accounts on the go.
Make sure you speak to an investment savvy mortgage broker, and not just go by the first hit you get with a Canstar search.

 

Might be a good idea to put your plan into numbers and make sure that your investment return after tax is higher than your mortgage rate otherwise you won't be really benefiting from all this.

Also, might be a good idea to factor in interest rate rises and your cashflow position as you will need to cover the expense of the new loan from your own cashflow

 

Thank you for your input.

Terry, why would an offset be necessary? Just in case I wanted to rent out the PPOR?

PaulF - Yes, I have run the numbers on my planned investments and am confident it will be beneficial.

Shireboy, thanks for the advice. I think I will schedule a meeting with a mortgage broker before making any decisions.

Thanks,

Bryce.

 

Without an offset where will you keep your cash?

 

I also have accounts with CBA for a little bit of rainy day money and my everyday banking. I would try to put most of my money straight off the PPOR mortgage if I can. I would prefer to have an offset but I don't think state custodians offer one in conjunction with the LOC.

 

Whats the attraction with State Custodians. I would never use them myself.

 

They just have the lowest rate on a line of credit that I have come across so far. I looked at AMP for the master limit facility but rates on the LOC are 5.25% pa. I will hunt around and see what other lenders can offer.

 

You should not have a LOC longer than until you use it. So with AMP for example it doesn't really matter what the rate would be as once you draw the LOC down you would convert it into a term loan the next day.

 

Oh okay. I didn't realise that. In any case, the rates for I/O for owner occupied are still 5.05%. I think I can find lower than that if I have a hunt.

 

Lower doesn't mean better.
Is there a need for IO?

 

Why is that? Are LOCs riskier? Can be called in at any time?

 

Yes, plus they can't have offset account and for serviceability they are often treated harsher

 

Not necessarily. Just thought it would be more tax effective so that more money could be directed towards paying down the non-deductible debt. Is there a better structure for this strategy? Maybe just try to set up multiple loan splits on a regular O/O loan?

 

why not get some professional advice?

 

Yes, that's what I'm thinking... Okay if I pm you at some point re: becoming a client and getting some help setting this up?

 

Hi Terry, can i ask why you wouldn't use them?

 

they are not an authorised deposit taking institution I believe. As such they wouldn't have an offset account - which is usually important for debt recycling.