Debt Recycling is a clever strategy to help you pay off your home loan far sooner than what you ever thought was possible. It allows you to repay your home loan quicker saving large amounts of interest, which in turn builds your wealth sooner in an investment portfolio outside of superannuation and increases your tax deductions each year, saving you tax.
This can benefit anyone who has a home loan with equity, and wants to start investing for the future now.
Debt Recycling works in 3 key stages:
- Using your home equity as security for a separate investment loan.
- Using investment income and any tax savings that you receive from your investments to reduce your outstanding home loan balance.
- Re-borrow from your investment loan throughout the year, and use the amount that you have paid off from your home loan to purchase additional investments.
Jack and Kate have a home loan of $350,000 with a 5% interest rate paying $500 a week. Jack earns $80,000 a year and their home value is $500,000.
They want to build wealth for the future and pay off their home loan as soon as possible. They use $300 per week of current savings towards the Debt Recycling strategy.
By using this strategy, Jack and Kate have paid off their home loan in 10 years, that’s 10 years before they would have done so, without using the Debt Recycling strategy.
Jack and Kate will also have built a net investment portfolio, which after 20 years will be worth nearly $750,000.
The graph below illustrates that if they wished they could pay off the investment loan earlier, using the money previously used for the Home loan. Over the 20 years Jack has also created additional tax savings of over $160,000, or an average of $8,000 per year.
Interested to find out more about how Debt Recycling can help your situation? Contact us today.
James Mulhearn CA – Director