Debt Recycling - VAS/VDHG/VHY or LICs

Hi team,
Wanted to create a bit of discussion around the various financial tools people are using to debt recycle. Has anyone had any horror stories recycling with a lower yield/higher growth ETF like VAS and wish they went with a pure yield play?
Vice-versa, has anyone been recycling since the start of the last market cycle (2010-11) with assets like VHY/LICs, have now finished converting the debt and wish that they had some higher growth assets?

 

There is always the option of selling. If its low growth the cg wont be much. If its high growth you probably had to sell periodically to recycle faster anyway.

 

I am definitely no expert but one thing I can see being more appealing for high yield choices when debt recycling is that the higher the yield the quicker you can recycle and turn even more of your debt to deductible debt.

 

Don't forget the role of capital gains in debt recycling - can be higher bang for your buck

 

You shouldn't make investment choices based on yield. In this scenario the higher yield could be useful, but that yield will come at a cost (e.g. lower total return, higher concentration, higher risk, higher tax, etc.)

 

Valid point

Would I be right in assuming the fact that OP is purchasing for the purpose of debt recycling doesn't really change anything? Like if he already had a preference to higher yield or higher CG to suit his situation he should just continue down that path?

 

If there is no expectation of dividends then the interest could not be claimed - which makes it hard to debt recycle initially, but later if the shares are sold the interest could be used to reduce CGT and the proceeds used to pay down non-deductible debt, after tax.

 

Be careful of ONLY looking at yield - check the price chart too, some shares give great dividends but the shrinking asset price means you're lucky to get your capital back when you're all said and done.

 

Thanks guys, all good points. Whilst I’ve got you here, may as well ask a further question;
If one’s plan is to recycle for 10-13 years to pay off initial debt, and then the investment debt afterwards, it would appear that a LOC would be a more efficient way of doing this. The thing is, I can’t find much info on interest only terms for LOCs, with some sites (State Custodians) saying that their LOC is interest only for 5 years, whereas the general commentary is that they’re interest only in perpetuity (which doesn’t really make sense to me?)
Do any experts recommend the LOC approach over the split loan approach? If not, why not?

 

Best to avoid the LOC products in most cases

 

Why do you think LOC is more efficient? Lower rates using a split from a PPOR/IP loan

 

I was presuming that the refinancing upon completion of interest only periods would be a challenge using splits?

 

hi @Terry_w

just want to check if this is what you mean when you mention about the role of capital gains in debt recycling. say,

• I bought a 1000 units of an ETF for $50 on Jul 1 using DR.
• On July 2 the following year, the ETF is trading at $75 and i sell all of 1000 units for $75 on jul 2. i make $25000 gross profit.
• CGT likely to be $4062.50 (= $25k * mytaxrate (0.325) * CGT discount (0.50))
• Net profit of $20937.
• I would have $70937 to reinvest now. Effectively $20937 more to debt recycle than before.

Have I understood you correctly?

THanks in advance!

 

Just be careful in that you've now sold off your dividend stream. Realising capital gains now, but missing out on future dividends.

 

Hi @ShireBoy, my intention is buy back the ETF shortly after locking in the capital gains.

Basically, referring to my example listed in post #13 in this page, I'd recycle $70937 of non-taxdeductible home loan, and buy the ETF i sold earlier. Since I paid CGT from the sell, I will have slightly less amount to invest now ($4062.50 lesser). I would hope the share price of the ETF reduces a bit, so I can buy back atleast the same number of ETF units I had before.

Just want to check with folks who're doing Debt Recycling and @Terry_w that this approach is what folks are doing and I am not missing something here. Thanking you!

 

When you sell pay tax and buy back you don't have as much capital working for you as some has been eaten away as tax. But you will be saving tax by increasing deductions

 

i am a noob but i don't understand the intent here.

you sell and cash out - and pay tax on it, then you just re-invest it again? i thought maybe if you put that back into your home loan and then pull it out, that you may be able to make it tax deductible...

what am i missing?

 

Yes, I am looking to do the latter - put the proceeds from the sell back into the PPOR loan (i.e. using my example in post #13, i'd put $50k into DR loan that was taken originally, the remaining $20,937 would be used to recyle more non-taxdeductible portion of my PPOR loan (i'd create a new PPOR loan split for $20937, transfer $20937 into the loan)), then transfer $70937 from each of the loan redraws (i.e. 50k loan and the new $20937 loan) and buy shares again. That's why i used the word recycle in italics in post #15.

 

btw @km1974 I have not actually done what I've listed in the above post. I wanted to put it here in these forums to see if this is what folks who've been doing Debt Recycling for ages tap capital gains in their Debt Recycling strategy. Cheers!

 

I have a thread on this topic.
Dividend are small after interest is taken out so are a slow way to debt recycle. But the capital gains can be much higher and realised gains can allow for greater ability to debt recycle.