Debt Recycling - What is it?

If you’re thinking ‘What’s that?’ then you’re in the right place! Debt Recycling is a strategy used to reduce non-deductible debt (Like a home loan) while simultaneously increasing tax-deductable debt (Like an investment loan.. see where we’re going?)  

Here’s how it works:

You might be thinking, well can I just take investment debt from the bank to buy a home and claim this… you definitely cannot.

But say you had a $100,000 deposit that you were thinking you’d put towards a new investment property. You would 100% not do that.

Instead, you would put that into your home loan to reduce your home loan balance by a massive lump sum. Making a huge and satisfying dent in the debt you borrowed to buy your home.

Now that you have more equity, we simply take out a different $100,000, but the bank is made aware from the start that this will be used to buy a new “Investment Property”. And when you do, the money was truthfully and correctly used to buy an investment property., You have just recycled your home loan debt into investment debt. Instead of using your own personal hard-earned cash to invest, use the banks, and put your hard earned into the home loan. This way, you’ll have it knocked over years or even decades earlier.  

So just to summarise:

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1. Use Equity – Borrow against the equity in your home to invest in income-generating assets such as property/shares/managed funds
2. Use Investment Income – Use the investment income (Rent/Dividends/Capital gains) to then pay down your non-deductible debt (Aka your home loan)
3. Claim Tax Deductions – Claim tax deductions on the interest paid on your investment loan
4. Repeat, repeat, repeat – Repeat the cycle by using the investment income to pay down the non-deductible debt and continue investing in income-generating asseta
   

That’s the gist of things, but as always, it’s recommended to seek professional advice from a mortgage broker or your financial advisor to help you make informed decisions.

Pro’s and con’s people!