3 Reasons to Debt Recycle Your Home Loan
A home loan is usually the biggest debt of your life. Many people avoid investing more money elsewhere before they have paid off this debt.
But using equity in your home loan and investing in other asset classes can be enormously beneficial for your financial future. Investing early means you can enjoy the benefits of compound interest and grow your wealth quicker.
Debt Recycling can be an extremely cost-effective and tax-efficient way to grow your wealth.
What is Debt Recycling?
A simple definition for debt recycling:
Debt recycling is the process of replacing your mortgage debt (bad debt or non-tax deductible debt) with investment debt (good debt or tax-deductible debt).
So what does that mean? How does debt recycling work?
Debt recycling essentially works by taking out equity from your home and investing the same money somewhere else, where you may potentially increase your income. Income from these new investments can be used to further reduce your home loan balance, while you also get to enjoy the growth of your investment.
The primary goal of debt recycling is to reduce your non-tax-deductible debt faster than just your minimum repayments – while also accumulating wealth.
Here’s an example of how debt recycling works:
Let’s say you have a home worth $500,000 with a $300,000 loan. Within the $300,000 loan you have $100,000 in the home loan redraw.
With a debt recycling strategy, you can choose to use all or part of the $100,000 in redraw and invest it. The interest on this amount redrawn is now tax-deductible, provided you invest in an income-producing asset.
What are the Benefits of Debt Recycling Your Home Loan?
There’s no doubt that debt recycling comes with risks, but there are significant benefits that can make up for it. Here are some of the major pros:
Benefit #1: Pay Off Your Home Loan Faster and Save on Interest
A common goal for many homeowners is to pay off their mortgage as soon as possible. Debt recycling can help you do this.
By directing investment and other available income into your home loan, you can have the opportunity to pay it off quicker and therefore save on interest.
Benefit #2: Save Tax by Making the Most of Tax Deductions
Debt recycling comes with certain tax benefits.
Borrowing to invest can provide tax effectiveness through the deductibility of interest. This will reduce the total cost of the strategy to you. The higher your marginal tax rate, the more profitable this strategy will be for you.
Important to note: Although gearing can deliver tax benefits, the risks associated with gearing may mean it is unsuitable for you. It is essential to carefully consider these risks with a financial planner before using a gearing strategy.
Benefit #3: You are Able to Enter the Investment Market Without Having to Wait to Pay Off Your Mortgage
For keen investors looking to make more investments, debt recycling can allow you to enter the investment market sooner.
Many people wait to invest until their mortgage is paid off but this means that many people aren’t investing until the age of 55 or even later! Plus, many people who have only invested in property miss out on the diversification benefits – security and protection of your wealth.
Debt Recycling can be risky, but it can also be a great investment in your future.
How Can Blue Financial Ballarat Help You?
Getting financial advice for your investments and retirement is crucial; that’s why it only makes sense to work with a financial advisor you can trust.
Blue Financial Ballarat is one of the oldest and most trusted planning firms in the city of Ballarat. We help individuals manage their wealth, save for retirement and their future and live the life they deserve.
General Advice Warning: This article 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.