Impact of market drop on Debt Recycling

Discussion in 'Investment Strategy' started by JazzyOnline, 10th May, 2020.

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  1. JazzyOnline

    JazzyOnline Member

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    Hi All,

    Have purchased my first home just at the beginning of the year (pre-COVID) and have an 80% LVR (even now). I have begun to read about Debt Recycling recently and am planning to start the strategy with about $25k of my savings in offset. Investment is strictly into Dividend stocks.

    My primary question is - how are those of you Debt Recycling into stocks doing with drop in markets and slashing of dividends? I had read that buying stocks with leverage amplifies gains & losses, so was curious to know what has been the impact to current Debt Recyclers with drop in market? Any horror stories or is it just a matter of paying interest on your Inv Loan with no income from shares?

    The next question I have is since I plan to start small, what sort of fees & costs are involved with Debt Recycling to buy shares? What is the minimum investment to make it worthwhile? I will probably need a financial planner to setup everything for me, but have no clue how much they
    charge? Any ideas of ballpark costs would be greatly appreciated.

    Thanks.
     
  2. Terry_w

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

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    Debt recycling can work in a falling market, it can even work where the income from the investment is less than the interest you pay.

    It is leverage without leverage though. If your loan is $100k and you pay it down to $75k and reborrow $25k overall you have not borrowed any extra and the asset you did borrow for with the redraw is not mortgaged.
     
  3. JazzyOnline

    JazzyOnline Member

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    Thanks Terry.
    Understand the bit about it not being additional loan, rather a tax deductible form of my own funds put to use.

    “it can even work where the income from the investment is less than the interest you pay.” - this part is not clear. Can you please explain how one is still better off when the income is lower than the interest charged?
     
  4. Jess Peletier

    Jess Peletier Mortgages, Finance & Property Strategy Aust Wide Business Member

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    The alternative to debt recycling is buying the shares with cash.

    The value of the shares - or reduced income from the shares - is the same regardless of whether you buy with cash or if you debt recycle.

    The benefit of converting non deductible debt to deductible is not affected by the performance of the shares.

    The real impact in reduced cash flow from the shares is that you won't be able to use that cashflow to further reduce your non deductible debt - so the snowball effect won't be as pronounced...but that's the risk in any investment, it may not go the way you think.
     
  5. Terry_w

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

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    capital gains...
     
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