What is debt recycling?

Answer

Debt recycling is a way to recycle the non-deductible debt from your family home into tax-deductible debt. You may even use any earnings from this ‘debt recycling’ strategy to pay off the debt on your family home loan.

Why would you consider this strategy?

Your family home loan is often not considered good debt because it doesn’t generate an income and the interest repayments are not tax-deductible.

Debt recycling can potentially help you build your long-term wealth, but it’s a high-risk strategy because you’re using your home to invest. If your investment performs poorly or interest rates increase, you could face significant financial stress or even put your family home at risk.

This strategy isn’t suitable for everyone. You need to have an appetite for risk and be comfortable with using the equity in your home to invest.

Here is a scenario showing how debt recycling might work:

  1. Use equity in your property as security for an investment-purpose loan – this means your home will be used as security and may be put at risk.
  2. Use the borrowed money to invest in an income-producing asset such as a managed fund, an investment property or shares.
  3. Use the income generated, plus any tax advantages of a geared investment, to pay off non-deductible debt in your home loan.
  4. Increase your investment-purpose loan by the same amount that you have paid off your non-deductible loan, and reinvest that increased amount.
  5. Repeat this process each year until your investment-purpose loan entirely replaces your non-deductible loan.

For a debt recycling strategy to work you need:

  • A regular income that is generated independently of this debt recycling strategy. This income can deliver a surplus cash flow to cover the interest payments on your investment loan.
  • A long-term investment focus.
  • A willingness to increase your debt and hold an investment loan.
  • Tolerance for risk and short-term fluctuations in investment value.
  • To consider Income protection insurance, which may provide replacement income in case you’re sick or injured and unable to work.

Seek financial advice

It's important to understand all the risks involved when it comes to debt recycling. Make sure you seek financial advice before implementing it as a strategy.

Important information

Show more

This information is provided by AMP Life Limited. This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.