Australia’s love affair with property makes it seem as though half of Australia is saving for a deposit on a house whilst the other half are trying to pay off their mortgage!

If you have a mortgage though, there are some tax effective strategies that you might want to discuss with us that can help you pay down your mortgage faster, and even help to make you richer.

Introduction to Debt Recycling

One strategy is debt recycling.  This is where you don’t just pay off your mortgage but you recycle the debt and use it as an investment tool.  It means using the difference between the amount you owe on your mortgage and the value of your house to potentially reduce your mortgage at the same time as building a sizeable nest egg.

An example— Debt Recycling in action

Let’s suppose you paid $300,000 for your home four years ago and it’s now worth $450,000.  This may allow you to borrow $120,000 (80% of the increased value) as an investment loan and the interest would be fully tax deductible.

You could then invest the $120,000 in an investment of your choice, perhaps a Managed Fund, or maybe another property.  The choice is yours.  At the end of the year, any extra equity you may have built up in your property could be borrowed and invested again.

The good news is that by using this strategy the non tax deductible mortgage (“bad debt”) is slowly converted into a tax deductible investment debt (“good debt”).  Your mortgage is reduced, while at the same time you’re building an investment portfolio.  In addition, the income from your investment gets paid into your non tax deductible mortgage which accelerates the rate at which the “bad debt” is paid off.  When your mortgage is paid off, you can then make the decision to either sell your investment and pay out the investment loan, or to keep the investment using all the income to reduce the investment loan, or even take a new investment loan against your home and increase your investment in another investment opportunity.

Like any geared strategy though (i.e  a strategy where you use a loan), debt recycling can not only increase your gains, it can also increase your losses.  This can happen if the interest cost is higher than the returns you generate from your investment.  Obviously a longer investment time frame is required to reduce this risk.

Many people think they have to pay off their mortgage before they can spare enough money to invest.  The problem with this idea is that if you do that, it might take so long that you won’t have enough time left for your investment to grow and mature.  Your best ally with investing is time.  This strategy can help you make the best of both worlds.

Could Debt Recycling be the right thing for you?

Of course, debt recycling isn’t suitable for everyone so be sure to speak to a Financial Spectrum financial adviser who can assist you in making a decision about whether debt recycling might be a good strategy for your personal situation.  Give us a call on 1300 886 018 or fill in our online request to book in for your free first meeting with one of our financial planners in the Sydney CBD.

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