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DEBT RECYCLING – GOOD, BAD & UGLY

DEBT RECYCLING – GOOD, BAD & UGLY

Would you like to?

• Pay off your home loan sooner

• Save home loan interest & tax each year

• Create wealth for your future

• Maintain your current lifestyle

If the answer is yes then a debt recycling strategy might assist you to achieve these objectives.

What is Debt Recycling?

Debt recycling works by distributing or recycling your home loan into an investment loan which the interest is tax-deductable – whilst building an investment portfolio at the same time.

How does debt recycling work?

• Use the available equity in your home to put in place an investment loan.

• Use the proceeds from the investment loan to purchase an income-producing asset such as a managed fund or shares.

• Direct the income generated from the investment, plus any tax advantages to pay off non-deductible debt in your home loan

• Increase your investment loan by the same amount that you have reduced your home loan, and reinvest that increased amount into your investment portfolio

• Continue to repeat this process until your home loan has been replaced by your investment loan which is tax deductible.

Why recycle debt?

• By directing investment and other available income into your home loan, there is the opportunity to pay it down quicker and therefore save on interest.

• The interest payable on the new investment loan is tax deductible.

• The value of your investment portfolio will be higher and working harder for you.

• Investing at regular intervals reduces the timing risk in volatile markets.

• You could benefit from franking credits attached to Australian share dividends.

• You can access your funds at any stage (unlike superannuation). The portfolio can be sold if necessary and the loan paid out.

• Debt recycling provides for a diversified approach to creating wealth for your retirement. It can reduce the risk of legislative changes regarding your retirement savings inside superannuation.

• Investing immediately rather than waiting for your home loan to be repaid allows the power of compounding interest to start working earlier.

Borrowing money to invest.

Gearing (borrowing to invest) strategies are a popular wealth creation strategy. It can be used to accelerate your exposure to investments and create a larger portfolio than would have otherwise been possible. Debt recycling is a strategy that also carries a higher level of risk due to the gearing component. Some considerations include

• Do you have a high marginal tax rate so you can make the most of any tax benefits?

• Are you in it for the long haul? Gearing is generally a medium to long term strategy (at least 5 to 10 years).

• Is there flexibility in your strategy to allow for changes in your personal circumstances such as having children or a reduction in income?

• Will you lose sleep at night if your investment performs poorly?

No two investment strategies are the same, because every person’s circumstances differ. It is vital to get independent financial advice when you are investing and we will be pleased to help you achieve sound investment strategies. Speak to us on (07) 3223 6000 or email dean.demarco@cbfinancial.com.au

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