What are the benefits?
By using this strategy, you could:
• Replace inefficient debt with efficient debt on a regular basis, and
• Establish an investment portfolio to build your long-term wealth.
How does the strategy work?
While it’s important to reduce inefficient home loan debt as quickly as possible, it’s also important to build wealth for the long term to meet your lifestyle goals, such as retirement. However, many people wait until their home loan is paid off before thinking about investing. Unfortunately, this means they invest later in life and don’t give their investments time to grow.
One solution is to transform your debts using a financial windfall.
Another approach is to use what is known as debt recycling.
With debt recycling, you need to:
1. Use the equity in your home to establish an investment loan (such as a line of credit)
2. Invest the borrowed money in assets such as shares – either directly or via a managed fund, and
3. Use the investment income and tax advantages from the geared investment, as well as your surplus cashflow to reduce your outstanding home loan balance.
At the end of each year, you then need to borrow an amount equivalent to what you’ve paid off your home loan and use this money to purchase additional investments. This process is then continued each year until your home loan is repaid. After that, your surplus income can be used to acquire additional investments or pay down your investment loan.
To find out whether debt recycling suits your needs and circumstances (and how you should go about it), we recommend you contact Integral Financial Planning located on the Gold Coast by phoning 07 55592250.