Tax Tip 2: Debt Recycling

You can still debt recycle with a PI loan.

 

From my understanding still worth debt recycling with P&I. I believe the tax benefits will diminish over the life of the loan as you pay back principal on the 'investment' loan, and your interest payments get smaller and smaller

 

You will still be saving money

 

Yeah my understanding also, I will look to refinance the loan to i.o in the future. This just helps me get the ball rolling.

 

You arent thinking about this longer term. P&I doesnt stop anything. Many people in this example debt recycle more than once. Time refreshes the deductible debt as new equity therough increases in property value OR in debt reducion, perhaps even both. Recycling can occur more than once.

eg Fred borrowed $200K as a equity out as a new split on the home loan. Three years later the property has increased in value by $400K and debt has been paid down slightly by $15K to $185K. He can access another $200K of equity out based on bank servicing calcs despite the extra equity allowing up to 80% x $400K. He applies for and gets approved for a increase to the $200K original debt split. He draws that down so the share investment loan is now $385K and invests the extra $200K in more Vanguard ETFs.

 

Paul that sounds like borrowing to invest and not debt recycling to me.

 

This is just investing an extra 200k in shares using equity, not really making an existing loan from non-deductible to deductible?

I was more talking about after paying off the initial 15k, you are paying interest on 185k which is deductible. Over the life of the loan, the 185k balance goes to 0. And you will be holding 200k worth of shares, that will - at that point in time - be as if you had bought them with cash.

At this point, you could release the 200k equity (if bank allows), and invest that again. But then you've just taken out a new 200k loan for shares, at owner occ rates

 

It is if the equity is built from shifting non-deductible to deductible using the property security v investment use. This strategy has gained a lot of focus since the UK killed property interest deductions. Its killed off their recycling industry. And its propsoed same will happen in NZ. So people are shifting to using their property equity in a deductible way. ie not property expenses. They call it debt farming , debt recycling and equity borrowing and another name I cant recall off top of my head. I can see it shifting things here if our Govt were to trim interest deductions for IPs and like they announced in NZ. There is a major push by property owners to repay property debt and switch debt use to shares etc.

My warning to all this is all those who have debt recycled in UK and NZ face a zero deductible for a larger debt and no solutions. Unless you have a offset then you may be able to reverse it out and invest in non-property. And claim deductions. Its a debt exchange (I think it was one of the buzzwords)

This could happen here BUT the re-election may just limit any action. But in the UK and NZ Govt examples they argued (quite well) they didnt break any promises. They didnt stop neg gearing. They stopped "interest deductions funded by taxpayers". Neg gearing is still allowed. A dubious claim but media and general public seemed to feel it was fair. Blame investors for the blow out in taxpayer deductions !!

 

I don't think we are talking about the same thing based on your comments in this thread and the other thread.

 

BankWest offering multiple offset accounts

Offset Account | Bankwest

Up to nine offsets per loan, and *up to 100% Offset

 

that is great for segregation of savings but doesn't really have any practical use with debt recycling that I can think of

 

@Terry_w

If you set up one of those accounts solely for Debt Recycling, won't it assist to ensure you don't mix any money going in/out?

You could also have offsets for emergency funds, Christmas, holidays, taking those out wont contaminate the Debt Recycling account?

 

Would it actually cause mixing if only savings are contained within the one offset though? If withdrawals were debt recycling, Christmas, emergency fund etc I thought no mixing would be occuring anyway?

 

No it won't help because when you debt recycle you would still have the offset account attached to the split that isn't deductible.

This product allows multiple offsets on the one split.

 

I just thought how it might help - maybe

Example
Homer has $100,000 non-deductible debt and $100,000 cash. He pays down the loan to $1 and redraws it into 10x offset accounts linked to this one split. He makes sure no mixing and no other money goes into those offsets.
He then uses one offset to buy X shares, one to buy Y shares.

But he could have done the same with just one offset anyway.

 

If you pay down the $100k split to $1, what happens to your regular scheduled payments? Do they stop? How do you avoid the loan being fully paid out and closed?

 

Thanks Rolf,
I am having an equity release processed by CBA currently as a new split, and the plan was to put the amount back into redraw of that split, rather than putting it in a mixed offset.
How do I stop CBA closing my loan in this example?
Would creating a new offset and putting it there be a better idea?

 

is it PI or IO?
if PI and you leave $1 owing it would close itself off in a month.
You could put the money anywhere until you are going to use it and then put it in and redraw again a day before you actually use it. But the interest won't be deductible until used.

 

Ok Terry thanks, I'll just put it in an offset, and remember to paw down the split and redraw before use.