How to use debt recycling to your advantage

If there is a lot of revenue lost to the government from such arrangements, the ATO will start to look at them more closely - especially if they are mass-marketed. (And to my mind they have a bit of the feel of ""tax effective investment" schemes of the 1990s about them)

Can anyone tell me...?

Does this strategy only work if the return you'd be getting on your investment is significantly higher than the interest on the LOC loan? Current interest rates on loans are around 8 or 9%, which is pretty well what you can expect from an index fund, so would the two cancel out and leave you no better off?

There is no answer,any maths will be wrong.From 1991 until now an outlay of $12 to 13 K to buy 1,000 shares in CBA and NAB.
You now have around 7000 shares in each of them worth ~ $1.1 million.The share price changes daily,I wouldn't bother looking at it,you'll drive yourself mad.

Pay the loan off as fast as you can.By 1995 or 1996 ANZ and WBC had doubled in price after they decided to stop working hard to put themselves out of business.A ~ $ 2.50 low for both of them ~ 1992.By 1996 they were ~ $5 to $6 each.You might have topped up the line of credit by $~ 6,000 to buy 1,000 in each of them.Call the whole thing an outlay of $20,000.Then the dividend income was used to get more shares using the DRP. Today you've got 4 banks worth around $1.5 to 1.6 million,give or take .

You have a guarantee that most people are going to deny that.That will go on forever.Billions of $$ may flow from that outlay over 100 or 150 years.A 100% guarantee on the fact that most people will deny that.

If you try to make it complicated and think everything has to be to 3 decimal places then you will never see the simple and the obvious.Nobody knows,at 9% you double your money every 8 years.The bigger the number is at the start,the bigger the number is at the end.The loan is reducing depending on the speed you pay it off. Worrying about would I be $20 better off or $20 worse off is completely pointless.

Hi Kevin,

Thanks for your reply. I'm afraid I'm having a little trouble understanding it though. Are you saying that debt recycling doesn't work, and that you're better off just paying off a mortgage as fast as possible and *then* investing in shares?

To my mind, if the interest on a LOC loan is 6% and your average return in the market is 9%, then it would be a valid strategy, no? But if interest rate on LOC loan is comparable to market return, you're no better off.

Without body language and talking it is difficult Martin. The home equity loan ( that is confusing,people give it different names) could be taken up to $80,000.I owed $40,000. So I had $40,000 to play with.
Spend $6,000 to buy 1,000 shares in CBA,then spend $6,000 for 1,000 shares in NAB.

The debt is now $52,000.As I was always overpaying on the mortgage there wasn't really much of an increase in the fortnightly payments.The small tax rebate helped that.

Interest rates will rise and fall,don't concentrate on them. After 4 or 5 years of paying the mortgage down say it was down to $49,000. Spend 6,000 to buy 1,000 shares in ANZ.Spend 6,000 to buy 1,000 shares in WBC. The debt is now $61,000.As interest rates had fallen quickly from 1991 to 1995 or 1996.the fortnightly payments that you kept the same ( ish) would pay the payments on $61,000. At each stage you calculate how much of the mortgage is owing on the house,and how much on the investment bit.To make it easy say 75% of the mortgage isn't deductible and 25% is.Buy more shares and that will go down to 70% non deduct,and 30% deduct.If you keep buying more shares it will end up at 1% non deduct,and 99% deduct.Or the loan is paid off.

If you reinvested the dividends then you have ~ 7000 shares in CBA and 7000 shares in NAB. You have ~ 6000 shares in ANZ and 6000 shares in WBC.Just multiply it up at closing prices each day.I wouldn't bother doing that.

If you didn't reinvest the dividends then you have 1000 shares in each of them,so CBA $125,000. NAB $35,000. ANZ $30,000 WBC $25,000. Your portfolio is worth $215,000. Probably slightly less than what people have in super.BUT!,people have been paying into super over those years.The banks have been giving you thousands of $$ each year ( dividends) to pay the loan down,go on holiday,or reinvest it.

If you were doing the same thing today then say the equity loan can be taken up to $500,000.You owe $320,000 on your mortgage.The cost of buying 1000 shares in CBA and NAB is $160,000. The mortgage is now $480K.

2/3 rds of the mortgage is non deduct and 1/3 Rd is deduct. Pay the mortgage down as fast as you can Use the dividends to help pay the loan down Reinvest the dividends will be a better result Whatever you want to do.

35 years into the future you may have 6,000 shares in NAB,and 6,000 shares in CBA at whatever the price is then,paying out whatever the dividends are then for your retirement income.

Your house will be worth $X producing no income

Your bank shares will be worth Y and producing income.

Your super will be worth Z and producing income.

I would expect the 2 shares to be worth more than your super,but nobody knows.You would need to reinvest the dividends .

Leverage ( gearing) can make you rich,and it can also kill you. pay loans off as fast as possible and the tax rebates will help you.

The ATO gives you the fertiliser to help the money tree grow in the early days ( rebates).The ATO wants a share of the crop ( money ) when the tree starts producing. Tax on the income,franking credits help that,and no pension,or a portion of that pension.

You're on your own. Two very difficult things,understand compounding,and doing nothing

Those equity loans could be the greatest thing ever.You sent the money off to work for you,and time is money.

The maths is really easy Martin. People like to make things complicated.

Mortgage debt 40,000 @ 18 or 19%.
So the interest is 4 X 18 = 72(00) annually

5 years later mortgage rates @ say 10%.Debt $61000.
So the interest is 10 X 6.1 = 610 (0)

Never ever let anybody try to tell you that any of this is complicated

Target, 6,000 shares in CBA ( approx) and 6000 shares in NAB. Time period 35 years.

You can choose to spend the $160K on whatever you want,put it into super,put it into an index fund,put it into an ETF.Put it into whatever product they will invent in the future to clip the ticket.

You are always on your own emotional roller coaster.Whatever you do the crowd will always tell you you did the wrong thing

Raining and bored,no bike ride

"Does this strategy only work if the return you'd be getting on your investment is significantly higher than the interest on the LOC loan?":

Yes.

https://www.investmentpropertycalculator.com.au/free-mortgage-debt-recycling-calculator.html

Download spreadsheet:
https://www.investmentpropertycalculator.com.au/download.php?f=Free-Mortgage-Debt-Recycling-Calculator-v1.0.2024.xlsb

Mortgage Interest Rate (%): 8%
Return on Investment (%): 8%
Annual Loss from Debt Recycling: $780

Not including grey swans or flying pigs.

With savings less than a few times disposable income, saving more than 50% of income produces better results more quickly.

Nothing to do with Peter,he may know about this or he may not ,it is so funny as to how people see what they want to see.
Google the vomiting camel pattern.Quickly taken up and reported by well respected organisations and "experts" ,a the new signal to predict the future,a lot of research had gone into it.

I don't think anybody noticed it was released on the first of April.
Still buzzing and on that exercise high after a long bike ride.

Kevin, you almost have me wondering if I should get on a bike again for its' vim as look for your posts to see you still going on on a bike, meaningfully meant not snarkingly, L.

It’s a great strategy. Pay your mortgage right down or get well ahead. Then draw it back up and put into shares.

- diversify overall wealth
- create income stream for when you stop work
- build assets
- tax effective mortgage

I tried to do this but banks are more comfortable for investment property than shares.

They asked a whole bunch of questions for this strategy and how I will use the funds and in the end it was too hard. Bought an investment property and negatively geared it.

There are online spreadsheets, this seems a good one at first glance:
https://www.investmentpropertycalculator.com.au/free-mortgage-debt-recycling-calculator.html

Over 5 years, Annual Gain from Debt Recycling: $2,544 / $100,000.

With the valuation of investment and home and loan serviceability risks, I'd much prefer the:
. 'Save 90% of Disposable Income then Buy Home and Continue To Save 90% of Disposable Income' route,
perhaps initially using the:
. "Bunk of Dad&Mum" or similar as per
. https://www.firstlinks.com.au/financial-pathways-buy-home-require-planning

Hiya Peter,the UK system was called MIRAS ,mortgage interest relief at source ,I thought they'd stopped it in the late 1970s. The interest relief was on £25 K. or £30K.I was in the resources industry from Hartlepool up to the Hebrides ( Stornoway),we were paid well for long hours,and the average wages were around £ 3,500 a year for those areas. A good house in those areas cost 25 to 30 K. I think it is ~£150 K for those houses now.Those areas went from boom to destitute very quickly looking back.

Using your house to generate wealth ( debt to produce wealth) was easy if people saw it..The advert around 1990 put it on the house,with a pool ,a car and an aeroplane flying overhead ( holidays).CBA advert if I remember correctly.
Opened the account so equity in the house could be pulled out for investing.I'd used the Noel Whittaker plan of pay fortnightly so you pay an extra month every year,and if we had $30 or so left at the end of the week that went into the mortgage.The interest rate was the same,and the tax office was useless .Told them that I would be be using the facility for investing and ( made up numbers) 50% of the mortgage would non deductible,and anything over that would be deductible depending on the lump sum spent on shares.For example $40K was non deductible,anything over that was ,reducing in proportion of course.

Triple compounding,the house rises in price,all dividends were reinvested into more shares and they rise in price. I f I never did anything else across the years after buying CBA and NAB it would've still worked perfectly. Pay off the loan as fast as possible ,and redraw to buy more shares " on the house".

Everything repeats,the people that say it couldn't possibly be that easy,otherwise everybody would be doing it .The people that can think of the name of a company that went bust,so that proves CBA and NAB will go bust.The people that get everything 100% wrong,but it is wrong to 3 decimal places so it must be right .

I just want to be here in 2031 when the 1,000 shares will be ~ 8,000 shares working on probability, and the share price will be whatever it is on 30/6 or 31/12.Being here after 50 years of that would be great ,around 14,000 to 16000 shares in each of them then .

The waiting is the hardest part and, with 40 or 50 years of history to show what happened people will deny it and say it didn't happen.

There are no tax deductions for home mortgages in Australia because our governments are only interested in looking after investors rather than home buyers, with politicians' snouts firmly in the trough of property investing.

I have a "home loan" and it is fully tax deductible as I used it for investment purposes.

Long time student of your insights and book Peter, although perhaps foolishly I let my redraw on mortgage expire just prior to my retirement. I now find it nigh on impossible to find a bank that will allow me to take out a mortgage and redraw on my (owned outright) home without an income from employment. (despite assets and dividends incoming)

I did that too Chris,spat the dummy with the bank and then found out none of them will lend you money,or give you a credit card if you are old.Fortunately I'd set up a margin loan facility using stocks as the security.That was set up around 1999 or 2000. They seem to have no problem with that facility,perhaps because selling a house is a liquidity problem,selling the shares takes 20 seconds.

I think I get the interest on the margin loan @ 7.7%% ? interest in advance.Two weeks ago I did it and forgotten it already.Pay off a lump sum and the rest IOA. Probably down to 10% debt and 90% equity on that,so plenty of room to move there.

If there were tax deductions available for PPoR. then Capital gains would be applicable on selling the PPoR.

Your PPoR is CGT free when you sell it. Be careful what you ask for. or suggest.

Same with idiots saying Stamp Duty should be abolished. It is a once off payment. Removing it and going for a yearly levy along with your rates is perpetual and can be increased.

The 'CGT free' status of PPOR is illusory. Once you take into account all the non-tax deductible ownership and financing costs over the years (plus inflation), there's probably not much 'gain' anyway. Be careful what you think is true, but turns out to be not true.

@Alex, you also need to take into account you don’t pay rent to live in your PPR. If you were paying rent it would be out of after tax income.

The strategy is perhaps not as good as the article makes it seem. As the investment loan is highly likely to be negatively geared, you probably would have to use your other earnings to pay the interest from the investment loan. Those earnings could otherwise have been used to pay down the non-tax deductible loan. It would have been nice to read under what circumstances this strategy is most beneficial e.g. When interest rates are low enough that the strategy is positively geared, or if interest rates are high, then perhaps selling a portion of the increase in capital value of the shares every year to reduce the non-tax deductible loan by more than the alternative of not having the investment loan.

1990, house value 100K. 40K left on mortgage.Home equity loan is 80% of house value,so the loan can be taken up to $80K.

Pay the same amount on the mortgage fortnightly based on $80K.Everything reduces in proportion until the mortgage is down to virtually zero .Then spend $80K on shares,the whole house in now a tax deduction and you re still living in it. The extra benefit was interest rates went down from 19% to~ 9%?. You got a pay rise every year but still kept paying the same amount off the mortgage.

If you want a100 what ifs,and hypotheticals then analysis paralysis will rule your life and you'll get nothing at all done Do the things you can control,go to work,pay the loan down ,keep buying more shares and use the DRP

Retire rich,income keeps rising as dividends rise,and keep fit,you've got all day to do that

Hi Marty, commenters say they successful, Peter T's theory works, it's his principle (not mean loan principal) that works rather than dwelling on prevailing rates but longevity of time to counter non-deductible debt turning it around to work for one,, if high interest one sticks it out or fix if suits--wasn't always possible, banks at least consider that now on relatively low fee. Modernly one pays any cycle/savings/overtime to save interest, in1970's pre--Peter's 1988 experience, was hard to get bank to take extra payments of such a long term mortgage to afford in first place, monthly set in stone, even concept of fortnightly foreign to them, argued the toss 6mths as branch managers some authority then to influence a change, allowed after to/froing but he never really liked, headed for office if he saw me smiling at counter to get 2000 to go over road to pay share purchases if ahead on mortgage, (1st not 2nd loan as Peter got), balance often only $10 to keep alive and open (0.83c today) on only 1 application fee ever, a forgotten cost-saving re investing if many years of turning it over endless times and ought to be Hint no.1 for young people to aim for. Reducing principal, years on small 2nd fee to increase back, bank to make money somewhere if low interest income from fast repayers, then shareholder so didn't care about fee. Fair cop---used its' money half a century, low non-deductible debt, no CGT on sales as suggested, increased personal tax which never bothered as helped fund our lovely country.

Very good. I did much the same thing after reading an article by Hans Kuneen(?) from Colonial First State in the mid 1990’s. I used two lines of credit and as noted in the article this probably wasn’t optimal. With the benefit of hindsight I probably paid a slightly higher interest rate than an ordinary home loan split in to two mortgage accounts.

I have friends who used the same theory borrowing for managed funds. A combination of fees and seemingly lower dividends meant they did less well.

Speaking with the mortgage broker it is currently more difficult to get such loans if you are close to or in retirement.

The other thing that really boosts this strategy is being patient and waiting for blood in the streets and cheap capital raisings before deploying all your funds. As always this is easier said than done.

I’m glad it worked for you Paul. It certainly worked for our family.

Paul, and you never regretted it did you, not even with hindsight as it's time which proves the theory works? L

A simple but straightforward strategy .... the only issue is how hard it is to actually get any kind of loan from a bank these days given their risk management metrics !

There are definitely banks that will do it but it isn't easy. In my case I got lucky and I had a broker who offered it for clients so I didn't have to worry about finding the lender. The lender did offer an uncompetitive market rate but the broker was able to match it to a more competitive rate.

Anyone who does debt recycling should consider the opportunity costs for going down that path: requiring an initial higher cash flow as the mortgage liability will be greater (assuming an alternative of paying down the mortgage) or taking a loan for other investment purposes (ie. property and negative gearing). You've also got to have the stomach for experiencing a situation where you have a black swan event and take a considerable hit to the portfolio for a period of time. But if you can budget and have the risk tolerance I think it's a great option. And obviously a no brainer if you planned on investing in the market with a lump sum of savings anyway...