Loan Tip: What is Loan Recycling?

You have heard of debt recycling, but what about ‘Loan Recycling’? It is the reuse of a loan for something other than it was originally used for.



Example

Homer has 2 investment properties. One worth $500,000 has a $400,000 loan attached. IP1

The other, IP2, worth $500,000 has no loan secured against it – it is unencumbered.


Homer wants to sell IP1, but he will never be able to borrow again to buy another property so he asks the bank to substitute the security for the loan. It is currently secured against IP1, but that will mean the loan has to be repaid when IP1 is sold.


Homer gets the security for the Loan swapped over to IP2. IP 1 is no unencumbered.

Homer sells the property, IP1, and has $500,000 cash in his hand, but the $400k loan is still in place so he could deposit $400,000 in the offset account and slowly draw down on it to supplement his living expenses.

This is a retirement strategy but can also be used as part of a debt recycling strategy as well as a general investment strategy.

There are many issues to consider so get legal, taxation and credit advice first.

 

For the tax consequences, and a strategy, of Loan Recycling see
Tax tip 342: Tax Issues with Loan Recycling