Strategy: Using AMP’s Master Facility to Debt Recycle

Thanks @Terry_w
I was thinking more on the ease of getting access to funds. I may be on the cusp of borrowing capacity with the Big4 (I will need to do a check again). If AMP use a global limit and my offset funds are helping to pay down more principal, my global limit will be more readily available as I will only need to split and draw without going through many hoops?

Whereas if I were to focus on my CBA loan and had my offset funds paying down the principal, if I wanted to draw equity from this IP security, CBA would reassess my serviceability again?

Assuming that I was wanting an increase in my limits, both lenders would assess my serviceability but if it was just the principal amount I paid down, AMP has the master limit but CBA's loan is being paid down? Hope that makes sense

 

If you are using redraw with CBA there would be no reassessment, but if you wanted to borrow more there would be.
This would be the same case with AMP too, but I guess slightly different as other loans can be decreased and one loan increased.

 

Redrawing from loan and borrowing money after paying - Do these two have the same implecations for debt recycling or negative gearing? Because one is using paid off money to invest!?

 

I am sorry, but don't understand what you are saying.
Redrawing money from a loan is considered new borrowings. So if hte borrowed money is used to produce income it will be deductible. But lots of tax issues to consider.

 

Each loan has various add ons or options : Redraw, Offset, Equity cash out, and split so if one invests in shares using money from above mentioned options-will it be consideted Debt Recyclong and interest can be claimed?!

 

no. Interest will only be deductible where money is borrowed to invest.
Speak to your tax lawyer.

 

Just to be clear -is redrawing and investing in shares = borrowing?

 

It is.

but you need to carefully consider the side effects such as mixed loans.

 

Got it, thanks @Terry_w

E.g. total loan amount 200K P+I on 3.99% started 1st if July and in 6 months paid 50K into loan.

Now in Jan withdraw 50K and bought xyz shares

At tax time: 3.99% can only claimed for 50K (with 6 months duration)

Agree?

 

Not quiet.
Assuming the loan is has had no other deposit, 50% the interest incurred on the loan from Jan on the loan would be deductible if the shares are income producing.

 

Well other deposit can go into offset as its P+I regular payments (deposits)will go to the loan and yes 50K investmeant divis will also be channeling into the loan.

 

The whole purpose of the master facility is to avoid situations like this by allowing the borrower to split loans so that there is no mixing occurring and therefore no need to apportion interest.

 

If you have one loan with 2 purposes and an offset account you will be partially offsetting deductible debt. throwing money away

 

I’m trying to understand how this strategy is financially any better than either redrawing from your PPOR or using a margin loan to invest in shares for the below example. If you have $600k loan and $200k portfolio wouldn’t it be better to maximise your tax deductible debt via the margin loan and get the lowest rate for your PPOR which are around 3.5%? If you want to double your portfolio you can just extend your margin loan or redraw from your PPOR. What premium do you pay for the flexibility of facility agreement? I’m still new to this but it sounds like financial over engineering when the banks can’t even explain it, you have to go through hoops and the product can be pulled by the main provider.

Margin rates with Westpac are 5.45% so the after tax rate is much lower.

 

I would rather pay 3.49% than 5% on a margin loan. No margin calls either.

But this debt recycling is a different strategy to borrowing extra to invest

 

In debt recycling - is it important to have shares with divis % higher than the loan interest rate to make it work?

No one has crystal ball and one will be buying based on estimates and divis go up and down so if the loan % is higher than the income from reinvested funds-does it mean DR is flop?

 

It could even work where the dividends are less than the interest because there are capital gains

 

But if plan is to build share portfolio with DR then CG can't be realised if not selling!

 

The point of debt recycling in my mind is converting nondeductible debt into deductible debt that is invested in an asset that long-term has a high chance of its total return going up more than the the return you make by keeping the money in offset. One of the key aspects is you still pay the same mortgage payment each week (if P&I loan) whether in offset or debt recycled into shares. You just lengthen the loan duration by not reducing the principal as quickly.

But if invested in shares it gives you diversification away from your PPOR with its relatively weak correlation to house prices and provides potentially strong tax benefits. You could argue that getting less dividends (must have some though to be income producing for tax claiming) and more capital gains is better for tax purposes. Of course if dividends go down, the share price tanks and you sell out this is not a good strategy.