How do disciplined investors realise debt recycling benefits?
What is ‘debt recycling’?
Debt recycling benefits are realised when your investment strategy utilises wealth and debt management processes to convert ‘bad’ debt to ‘good’ debt. The ContinuumFP website library includes an article, ‘Bad Debt made Good‘ that further explains this strategy.
In summary though, over time this strategy will reduce the ‘after-tax’ interest cost on your private home loan borrowing(s).
[WARNING: it is imperative that the borrowings and management of the funds flowing in the implementation of this strategy be precise so as to ensure that the correct tax treatment is afforded the interest costs for the respective elements of the borrowings.]
Features and benefits include –
- Your interest cost will be lowered in real terms, as you build an investment portfolio
- Your investment portfolio will generate income which, with the tax benefits arising from the geared investment portfolio assist in reducing debt overall
- As your home equity increases additional funding becomes available for the investment portfolio
- The separate interest costs incurred must be carefully treated to ensure optimum benefit.
By reducing the real cost of the interest payable, this strategy is aimed at repaying your home loan faster while building an investment portfolio that is focused on capital growth, tax effective income and tax deductible borrowing expenses. The objective is to help home owners to more quickly eliminate non-tax deductible interest – and to commence an investment portfolio aimed at providing longer term wealth management goals and financial independence objectives.
Investors who gear (borrow to fund) their investment strategies need to be aware of the consequences of having debt against their assets: whilst the leveraging obtained in this way will magnify any gains made through the process, losses too will be magnified in any market downturn. This article is addressing the situation where the gearing is in place and is being managed firstly, to be more tax effective; and, secondly, to be reduced.
Debt recycling benefits disciplined investors
This strategy is dependant on the tax deduction available on ‘good’ debt; and it is important to understand the rules that the ATO will apply when considering the efficacy of the interest deduction claim in your tax return. To keep the records straight is imperative – and it can take discipline to avoid redrawing excess payments for personal-use purposes. This action could negate the claim: the advice and guidance of a tax professional should be sought in these situations.
How can you be more financially efficient…
Clients that are in the process of buying their own homes; who have at least 30% equity in their homes (on lender valuation); and who wish to use a diversified investment strategy that is focused on providing tax effective income and long term wealth accumulation, should arrange a meeting with one of the Continuum Financial Planners Pty Ltd experienced financial advisers. Whilst this is an investment strategy that involves gearing, we will provide you with the appropriate cautions as to the magnifying effects that gearing can have on an investment portfolio, both for the good and the bad!
We listen, we understand; and we have solutions’ to your financial planning needs, that we deliver in personalised, professional wealth management advice: please call our office (on 07-34213456) or use the website Contact Us facility to arrange your appointment – and whilst in contact, request our ‘financial health check’ questionnaire.
[Originally published July 2008; it has been revised and refreshed from time-to-time, most recently in March 2017]