Strategy: Using AMP’s Master Facility to Debt Recycle

Strategy: Using AMP’s Master Facility to Debt Recycle



Debt recycling is the conversion of non-deductible debt into deductible debt while investing.

See

Tax Tip 2: Debt Recycling https://propertychat.com.au/community/threads/tax-tip-2-debt-recycling.1472/



AMP have an excellent facility which they call the 'master limit'. It allows loans to be restructured without creating a need to reapply and pass a credit assessment.



This may be possible with a few other lenders, but as far as I am aware changing to and from a IO and LOC can create credit reassessments because a LOC is generally assessed differently to a IO loan. Westpac and Suncorp are lenders that allow easy splitting of loans and it may also be possible to transfer money directly from the loan accounts. So it may be possible to use these lenders too.

Here is a simple example of how it can work with AMP

X has a $100,000 non-deductible home loan which will take him years to pay off. He wants to speed up the process by use of the debt recycling strategy.





X applies for a loan with AMP and indicates he wants the Master Limit facility – note there is harsher servicing for this.



He asked AMP to split it into 2 portions
Loan A $80,000 as an IO loan + offset
Loan B $20,000 as a LOC

X saves up $20k in the offset then pays off the $20k LOC completely using the offset account money.



He then borrows to buy $20k worth of shares (or anything producing income)
Interest is now deductible on this split

X keeps saving in the offset account and now gets his dividends paid into the offset as well. Interest for Loan B is paid from the offset account.

Pretty soon X has another $20k saved and does the same thing.


Loan A is now split into 2


Loan A $60,000


Loan B $20,000 (already used for shares)


Loan C $20,000 to be used to buy more shares

Now he has $40k of the original loan deductible and 2 lots of dividends coming in. This speeds up the debt recycling.

To speed it up further X could consider periodically selling the shares when they are high.

X sells the first lot of share that he bought for $25,000. He pays off the $20k that he used to buy then and has $5,000 left over. He has to pay some CGT but he may be left with $4k. He parks this in the offset and saves even more non-deductible debt. He immediately rebuys more shares (after getting tax advice about wash sales). Even if he bought back the same shares at the price he sold them for he would be ahead. He might even get them cheaper.

X could do the same with the second lot of shares too - then he might have $8k extra cash to pay down the non-deductible debt. This considerably speeds up debt recycling.

Once X had purchased the shares with the LOC he would have immediately converted the LOC to an IO term loan as the LOC has a 0.15% higher rate.



Note that the same debt recycling strategy could be done with buying and selling property Strategy: Buy Sell Buy

But the problem with property is that there are high entry and exit costs and expenses meaning the income is often negative.



Who can advise on Debt Recycling?

Debt recycling itself is not financial advice. There is no need to see a financial planner for advice on the concept.

But shares are a financial product so advising on shares is financial advice which can only be given by a financial planner. This includes aspects such as what shares to buy, when to buy and when to sell.

This mostly relates to tax issues, whether the interest on the loans will be deductible and only tax agents or lawyers can give tax advice. Financial planners cannot unless they are registered tax agents or lawyers.

Brokers can advise on the loan products suitable for something like this.

Lawyers generally are not needed – except for the tax advice perhaps. But you might want to get advice on structuring the ownership of the shares. Whether a discretionary trust is suitable for your needs, if so how to get money into the trust etc.

 

And that how I paid my PPOR off

 

Using AMP?

 

I do a similar thing through CBA - pretty easy. Not as easy as a LOC, but just have to sign a form.

Once I've saved enough cash, I do a split, all but pay the new split down, then put those new borrowed funds into investment/business. I do this every month or so

 

Nice. How to you get the money from the loan to the investment if not using a LOC?

 

I can pay other people directly for business stuff
If for shares, I transfer it straight into my share settlement account.
I keep the splits separate eg for business, shares, and I sometimes end up with a thousand or two that I can't/don't use and just put it back on the loan.

I'm putting 15-30k per month into my business, so it allows a fairly rapid conversion of debt on the home loan. I haven't done a tax return yet though... hopefully I haven't messed it up somehow.

 

So you can transfer from the loan account directly?

 

Yes. Has a standard 'pay anyone' option the same as my offset/transaction accounts.

Interestingly, I don't think I could do this on the original loan/s - but each of the splits I've subsequently set up have been enabled to do so. Otherwise it would have been messy, but would have transferred via empty offsets - you can set up a separate offset for each separate split.

 

Thats good, i was worried you were transferring to an offset.

I didn't know you could transfer from a CBA loan directly.

 

Yes with AMP.

 

Terry, with standard loan with redraw product is there any better way you can see to sell part of the shares and maintain tax deductibility rather than entire portfolio. Lets say out of the 20k portfolio you sell 5k worth of BHP shares which were bought at 3k...with that can one park the 5k in redraw of that loan and reuse them to buy NAB shares and continue deductibility on that..

 

If you have borrowed $3k to buy shares and you sell those shares at a profit you would have to pay back the $3k loan. You could do this without needing to split issues
Tax Tip 55: An Exception to the rule about splitting before Repaying a Mixed Loan https://propertychat.com.au/communi...-splitting-before-repaying-a-mixed-loan.4729/

If you don't pay off the loan and use the funds to invest it is unliklely the interest would be deductible I think. But it depends on the pathway.

 

Thanks Terry, when you say pay off the loan do you mean deposit this 3k into owing loan and reduce it or parking this 3k into redraw of the loan account. If its former then I can't release that 3k without refinancing......

Also, i didn't think of this originally. If my original 3k of shares has returned 5k on selling....how can I handle that extra 2k capital gain received....can it be used for personal use? I mean depositing in non-deductible loan or something?

 

You have to pay $3k back into the loan.

Use the extra $2k for things such as paying off the main residence debt, buying carrots etc.

 

Once you have paid off your PPOR using this strategy, you now have a tax-deducatable debt, a paid of house and a large porfolio.

This is where i'm not sure what the most efficient way to go is...

Do I prioritise this deductable debt by putting all my dividends (from the portfolio i've created) into paying down the debt?

Do I also put the tax refunds into the debt?

What about additional repayments?

Or do I completely ignore all this, maintain the debt as IO with no reductions in principal and compound my portfolio with reinvested dividends?

For investment purposes, I wonder what would be most efficient...

 

depends. If you wish to 'retire' sooner and/or keep more flexibility you would keep IO and build up cash in the offsets.

 

Terry, if I pay 3k back into the loan (rather than parking in redraw). doesn't that mean i can only release those 3k back via equity release. Doing equity release (i.e. new application) for 3k is not that productive i assume...

 

What is the different between paying into the loan and parking in redraw?

 

The way I understand is paying off the loan is basically paying the principal off, no money available to be drawn out. Parking in redraw means it is available to be redrawn at any time.