What is Debt Recycling?

Wanting to pay off your home loan quicker? Debt Recycling might be a new way to reduce the amount you owe while building up long-term wealth.

The process is straight forward: you take the equity that you have in your property (which is the difference between the value of your home and how much you still owe on your mortgage and using that debt to invest in income-producing assets. The debt does not increase, you essentially are ‘recycling’ your debt into a new purpose.

Upon purchasing these new assets or investments, you can use the earnings from them to make additional repayments to your home loan, which will allow you to pay it off faster. Additionally, the interest on home loans is also tax deductible, so you can potentially create a tax saving. For the right person, under the right circumstances, debt recycling can be very beneficial.

There are a variety of ways to invest such as share portfolios, bonds or investing in property. Its best to sit down with a financial advisor to work out which income earning assets will best suit you.

BENEFITS AND RISKS
As with any investments, there are some important things to consider:

Benefits

– Option to invest immediately
– Building your investment portfolio
– Potential tax benefits
– Passive income generation
– A diversified approach to wealth creation

Risks

– Investing can lead to bigger gains, however when the markets are falling; larger losses
– Interest rate rises can lead to your repayments increasing
– Interest rates associated with debt recycling are often higher
– A lack of secure income source can prove risky

WHO QUALIFIES?
Not everyone is able to go down the debt recycling route and there are some things to check off before taking the leap:

• A home loan, with equity in your home
• A regular income that is generated independently of the debt recycling strategy
• A long -term investment focus
• Tolerance for risk and short-term fluctuations in investment value
• A regular income that is generated independently of the debt recycling strategy
• A willingness to increase your debt and hold and investment loan

For those who don’t mind taking on some complexity and seek out professional advice to ensure that this strategy is implemented properly, then debt recycling can be a profitable and effective way to reduce your mortgage faster.

Interested in discussing this more? Call our financial advisors for a free consultation.
Ph: 1300 187 358