Who's doing debt recycling?

Discussion in 'Investing Strategies' started by money_penny, 20th Jun, 2017.

Join Australia's most dynamic and respected property investment community
  1. money_penny

    money_penny Member

    Joined:
    18th Jun, 2017
    Posts:
    10
    Location:
    Australia
    Hi.I have $50k equity that I want use to build a share portfolio for debt recycling and would be interested in hearing from other people who do it. The plan is to use debt recycling to pay down the mortgage and eventually grow a portfolio big enough to live off. No plans to turn the home into a rental.

    From what I've read a line of credit seems to be the way to finance this but my mortgage is with ING, who don't offer LOCs. The financial planner says a LOC is better although a loan with a offset would be ok to start with. But the mortgage broker says it doesn't make a difference whether it's through a LOC or a second loan with an offset account. Is this correct?
     
    2 people like this.
  2. Corey Batt

    Corey Batt Well-Known Member

    Joined:
    14th Jun, 2015
    Posts:
    2,090
    Location:
    Adelaide, SA
    We set these up with clients from the lending and advice perspective- if done right it can be a potent tool.

    ING isn't particularly great in this space and there are definitely better options out there specifically designed for these strategies. Dependent on your exact circumstances - you should still be looking at sharp rates and a facility which will give you access to a LOC to draw from, and the ability to increase the LOC limit as you pay down the PPOR portion without having to make any further loan applications.

    Example:

    PPOR mortgage: 500k limit
    LOC: 100k limit, 100k available

    Let's say you go buy 100k shares with the LOC and over 12 months the PPOR mortgage reduces due to debt reduction to 450k, you could then adjust the loans as follows without any assessment:

    PPOR Mortgage: 450k
    LOC: 150k limit, 50k available (as the 100k was used on buying shares)

    Get the right advice and setup - the last thing you want is a subpar clunky loan structure which reduces the effectiveness of your plans.
     
    7 people like this.
  3. money_penny

    money_penny Member

    Joined:
    18th Jun, 2017
    Posts:
    10
    Location:
    Australia
    Thanks for the explanation @Corey Batt. Just been reading a property chat thread on what can happen when people don't have the right loan structure for debt recycling, so it's good to know what to look for.
     
    4 people like this.
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

    Joined:
    9th Jun, 2006
    Posts:
    27,120
    Location:
    Australia wide
    2 people like this.
  5. money_penny

    money_penny Member

    Joined:
    18th Jun, 2017
    Posts:
    10
    Location:
    Australia
    Thanks @Terryw My financial planner also told me about this product although my broker suggested to get the ING loan to start with and then apply for a LOC with another lender to replace the loan afterward. I'm now wondering if it's better to refinance to another lender that offers an offset home loan with a LOC, or keep the ING home loan and apply for a LOC rather than another ING loan? which as Corey has pointed out won't be as suitable for debt recycling purposes. Also if I refinance and want to draw equity, will the new lender do their own valuation to determine how much I can borrow (the $50k equity was based on ING's upfront valuation)?
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

    Joined:
    9th Jun, 2006
    Posts:
    27,120
    Location:
    Australia wide
    I would recommend AMP if you want to implement a recycle debt strategy. you cannot have an offset on a LOC, but you can set up the offset on one split and convert the LOC into a IO loan after use.
     
    2 people like this.
  7. Corey Batt

    Corey Batt Well-Known Member

    Joined:
    14th Jun, 2015
    Posts:
    2,090
    Location:
    Adelaide, SA
    AMP is definitely the best in terms of feature/options - this is what we use when setting clients up with debt recycling strategies. It does come down to your borrowing capacity etc whether you will qualify - but definitely the first port of call.

    If your broker isn't keen/well versed on the strategy - use someone who understands what you're trying to achieve. (especially if one of your professionals is a financial adviser who is familiar with the product - better to be working together than butting heads)
     
    2 people like this.
  8. SenK

    SenK Member

    Joined:
    14th Dec, 2016
    Posts:
    16
    Location:
    Adelaide
    I am using LOC to invest in Shares, i am with Bank SA and got few splits of LOC with my PPOR Mortgage. currently the interest rate on LOC is much higher, it is about 1.5% more than my home loan. so i am thinking to refinance and switch just for a better rate. first of all i would like to know whether this is possible because i am already invested in shares?, secondly if this is possible without selling all shares just transfer the borrowed fund to a new loan and how this can be accounted, i mean the interest rate etc? what is the best way to go from here.?
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

    Joined:
    9th Jun, 2006
    Posts:
    27,120
    Location:
    Australia wide
    Yes its possible and there should be no changes to deductibility of interest if you keep the loan splits the same because the use of the borrowed funds hasn't changed. This is just a refinance.
     
  10. Corey Batt

    Corey Batt Well-Known Member

    Joined:
    14th Jun, 2015
    Posts:
    2,090
    Location:
    Adelaide, SA
    Nice and simple. Just need to refinance and keep the appropriate splits. Some lenders are better than others in this space, especially on pricing of the investment equity release component.

    Are you looking at drawing more equity in the future to buy further shares as you pay down your PPOR via a debt recycling strategy? Get specific advice from a broker familiar with these structures to ensure you've got a good long term structure which will give you the flexibility to keep drawing funds with ease.
     
  11. SenK

    SenK Member

    Joined:
    14th Dec, 2016
    Posts:
    16
    Location:
    Adelaide
    Thanks @Terryw and Corey Batt.

    Yes i am thinking to borrow more and Invest in shares using Debt recycle strategy, if it possible without too much hassle.
    Currently i got 3 LOC split, one for shares, one for a small business and third one for a Car.
    As we are selling our business, i am thinking of close the other 2 LOC split and i borrow the total for shares. that is my current plan. is it a better way to go? can i just close the other 2 LOC's with the sold money? or should i just transfer into my offset? any difference doing this?
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

    Joined:
    9th Jun, 2006
    Posts:
    27,120
    Location:
    Australia wide
    Is the business LOC drawn? and the car split?
    If not you could just use that.

    Don't transfer to offset accounts or the interest won't be deductible.
    Seek tax advice before hand.
     
  13. SenK

    SenK Member

    Joined:
    14th Dec, 2016
    Posts:
    16
    Location:
    Adelaide
    Thanks Terryw, Yes all my LOC's have drawn 1.business , 2. Car and 3. Shares, as our business is sold and i am thinking to close my LOC's for business and Car and use that fund for share investing. the problem i have here is my LOC interest rate that is @5.5%. i will be interested to refinance and get the loan split with AMP with LOC or Interest only split, may i know what is the best rate i will get?
     
  14. lyessery

    lyessery New Member

    Joined:
    29th Jun, 2011
    Posts:
    3
    Location:
    Brisbane
     
  15. lyessery

    lyessery New Member

    Joined:
    29th Jun, 2011
    Posts:
    3
    Location:
    Brisbane
    The CBA VLOC is an excellent product for the "Smith Manuvour" (legal paying down non deductible borrowing with yield from leveraged income producing assets) because there is no repayment requirement up to the credit limit. However i would have a couple if you need any personal borrowing so you can keep the main VLOC pure.
     
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

    Joined:
    9th Jun, 2006
    Posts:
    27,120
    Location:
    Australia wide
    hi lyessery why do you call this the "Smith Manuvour" ?
     
  17. lyessery

    lyessery New Member

    Joined:
    29th Jun, 2011
    Posts:
    3
    Location:
    Brisbane
    The Smith Maneuver
    Is originated in Canada which has nearly the exactly the same investment/ taxation conditions as here.
    However the "smith maneuver works better here than in Canada as out meridian tax rate is higher, capital gains concessions is greater and imputation credits on fully franked shares more than zeros out any tax on the income producing assets' yield. Therein making *double gearing (*using home equity loans to provide a stake for a margin loan) very effective.
     
    Last edited by a moderator: 25th Jul, 2017
    2 people like this.
  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

    Joined:
    9th Jun, 2006
    Posts:
    27,120
    Location:
    Australia wide
    Thanks Iyessery. That link you gave has a different strategy to the one you described above. Both are good strategies, but it is essential to get tax advice on these, particularly whether the ATO could use Part IVA to deny any deductions - not sure if they have similar legislation in Canada but in Australia the commissioner can deny deductions for what otherwise would be deductible if it involves a scheme.
     
    4 people like this.
  19. Corey Batt

    Corey Batt Well-Known Member

    Joined:
    14th Jun, 2015
    Posts:
    2,090
    Location:
    Adelaide, SA
    VLOC with CBA is better than nothing, but no where near as beneficial as the lenders which have master limits/ability to rebalance your facilities with nil application. Not just for the cost saving of not having to reapply for every adjustment, but also with the changes coming through with lenders you may not even qualify/be permitted to make changes which is the reality for a lot of investors now across a multitude of lenders.
     
    2 people like this.
  20. Kat

    Kat Well-Known Member

    Joined:
    8th Aug, 2016
    Posts:
    179
    Location:
    Brisbane
    Anyone has luck applying for the AMP master facility loan?

    I spoke with a broker about setting this up, he said AMP wouldn't be accepting new applications.

    He may have been taking into account our desire to make interest only payments on the LOC.
     
    2 people like this.