What is debt recycling?

Answer

Your family home loan is not the most efficient type of debt. It doesn’t generate an income and the interest repayments are not tax deductible.

But there may be a way to recycle the non-deductible or ‘inefficient’ debt from your family home loan into more efficient tax-deductible debt. You can even use any earnings from this ‘debt recycling’ strategy to pay off the inefficient debt on your family home loan.

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. And if your investment performs poorly or interest rates increase, you could face significant financial stress or even put your family home at risk.

Here’s how debt recycling could 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 deductible loan entirely replaces your non-deductible loan.

So it isn’t suitable for everyone. You need to be comfortable with using the equity in your home to invest. And it’s essential to seek good financial advice.

For a debt recycling strategy to work you need:

  • A regular, independent income you can rely on to 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.
  • Income protection insurance—it 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

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It’s important to consider your particular circumstances and read the relevant Product Disclosure Statement or Terms and Conditions before deciding what’s right for you. This information hasn’t taken your circumstances into account.

This information is provided by AMP Life Limited. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you. All information on this website is subject to change without notice.