Borrow money to make money

Of course this doesn’t sit well for everyone but it’s a proven strategy for those who are willing to take on risk.

The technical name is Debt Recycling and it’s when you use tax-deductible debt setup for an investment portfolio (like investments in shares, investment properties, managed funds or any other income-producing assets) to pay down your debt that isn’t tax-deductible (like your mortgage). As a result you are growing your wealth, repaying your mortgage faster and saving money on income tax (which leaves more in your pocket to put towards paying down debt!)

Debt recycling involves using the difference between the amount you owe on your home loan and the value of your home (known as equity) to establish an investment portfolio of growth assets that have the ability to grow in value (but also drop in value) over time, and potentially reduce your mortgage.

There are a few key steps involved…
1. Use your existing home as equity for a separate, tax-deductible investment loan.
2. Use the money from this loan to start an income producing investment portfolio.
3. In most cases, you’ll then use the income generated by the investment portfolio, as well as the tax savings that this strategy will produce, to reduce your home loan (not tax-deductible).

There are also some important considerations when using this type of strategy:
1. There is risk associated with investing in growth assets, however can be partially reduced through diversification (putting your eggs in different baskets).
2. As debt recycling involves gearing (purchasing investments with borrowed money), any growth in the value of these investments are magnified. However, the opposite is also true with any drop in value also being magnified, when compared to if you owned the investments with your own money.
3. Interest-only means that unless you’re disciplined with the regular debt recycling, you’re not guaranteed to repay your home loan.
4. Due to a high level of debt, employment security is especially important when considering a debt recycling strategy, as is having a strong cash flow (money in – money out = money saved).
5. Regular contributions can be adjusted to suit your circumstances if they were to change dramatically (eg. Family).
6. You need to be at least a balanced investor (meaning you have a fairly high risk tolerance) to support this kind of strategy.
7. Some funds can remain in redraw (or an offset account) for emergency purposes and to assist with other large lifestyle objectives.

Debt recycling isn’t for everyone but those that do it can reap the benefits over the long term.

Many people are already doing it by borrowing money for an investment property, but sometimes fail to execute the correct structure.

If you have any questions on Debt Recycling or want to know if its ok for your personal situation then feel free to reach out to us.

7Wealth Pty Ltd ABN 44 609 210 246, is an Authorised Representative of AMP Financial Planning Pty Limited ABN 89 051 208 327 Australian Financial Services Licence 232706 and Australian Credit Licence 232706
This blog contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. If you decide to purchase or vary a financial product, your financial adviser, and other companies within the AMP Group may receive fees and other benefits. The fees will be a dollar amount and/ or a percentage of either the premium you pay or the value of your investment. Please contact us if you want more information.

December 17, 2019