Do you debt recycle? Any tips?

Hi all,

I am 29 and currently constructing a new home. Once it is finished, I estimate that it will be in the $750-$800k ballpark. Mortgage is about $380k. I am planning to refinance after the build to access some equity (at low home loan rates) and then invest in some income producing listed investment company shares. I'll then use the income to pay down the non-deductible mortgage debt further etc etc. I am aware that I need to ensure investment debt and mortgage debt are kept completely separate for tax deduction purposes.

Risks I am aware of:
1. Shares could go down (not bothered because I'm not going to sell)
2. Dividends could fall or stop (unlikely but could happen if there was an economic crash)
3. Interest rates could go up (probably won't happen this year, maybe start creeping up after then).

Anyone done this? Can you share your tips? Which lenders are best for this?

Thanks, Bryce.

EDIT:
Forgot to add my humble investment goals:
- Non-deductible debt at zero
- Passive income of $50k p.a (pre tax)
- ...By the time I'm 35.

 

Beware of capitalising interest as in don't keep deducting your interest from money left in an offset.

Basically you would put all income into your PPOR offset including income and dividends etc into the account to build it up. You would have the interest taken from the PPOR offset to build it up. Once full you would then start to fill up the investing offset.

You have outlined risks with shares which can be mitigated to a certain extent. However you would be looking for a > 5% after tax return on the investment as you are paying 5% post tax for mortgage repayment (assuming 5% I/R).

Even if a dividend pays you 5% you may still need to pay tax on it - depending on franking/income so you could be worse off from CF prospective and then would depend on CG (if there was CG - if a loss then again even worse).

We are doing something similar but we bought another property instead due to leverage we were able to utilise and were making a play for CG and not CF.

 

Thanks for the response. Where the interest payments come from and go to was a question that I had actually. Do the loans have to be set up as interest only?

I am hoping on the loan being around 4% and dividend yield being approx. 9% (grossed up - including franking). This leaves me with 5% return before tax.

 

Thanks Rolf. I have heard that AMP is good for this type of structure?

 

I have written a lot of tips on debt recycling, look at my tax tips and strategies.

 

Also look at what structure you use to buy the shares.

It could be advantageous (once the house is paid off) to purchase thought a trust/company.

 

How hard is it to take a bunch of different, messed-up loans (on multiple properties), and totally restructure them so that a debt recycling system is set up?

Looking into doing this has been on my to-do list since going to a Peter Thornhill presentation quite some time ago, but I'm worried that it is seriously in the waaaaaaay too hard basket

 

Its easy if you can service.

 

If I can service my existing loans, then I'm hoping that I'd be able to continue to do so. It's just the 'mess' of the multiple loans for multiple properties that's the issue. Plus, I'm not sure if I'd be able to borrow much more (for share purchases) - I'd need to get my finances assessed. When I tried to do a bit of a restructure only a few months ago, I was told I'd need to reapply for my existing loans, and I wouldn't actually qualify for the loans that I currently have - so I just left everything alone

 

Thanks for the kick in the butt, @Rolf Latham - I'll get onto it

 

I would like to know if DR can only be achieved if one has some equity in hand ?

E.g we are planning to buy a prop in the area where normal prop is around or above $1 mil -will we be able to do debt recycling straight away or we need to wait a bit then refinance it and start the strategy?

 

Debt recycling can work even when no equity. You just gradually pay off a split and reborrow like I described in
Tax Tip 13: Simple Loan Structuring Strategy Tax Tip 13: Simple Loan Structuring Strategy

 

Thx @Terry_w , I had a quick look in my lunch break but one thing leads to another so will review with my full concentration again as this mm at be useful for us

 

Thanks @Rolf Latham

 

In a nutshell, a debt recycling strategy may work for you if you have largely paid off your mortgage and have high equity in your home, with few other debts.

Above quote is fromhttp://www.archimedesfinancial.com.au/debt-recycling-strategy.php