What is Debt Recycling and How Does it Work?
We all know how debts work, and when it comes to investing in long-term properties, debt recycling can be a great way to increase your existing assets. Now, what is debt recycling?
Debt recycling is a way of repaying your mortgage by investing valuable assets to generate income. This asset might be an investment property, stock, or any item designed to generate long-term income. For example, it involves leveraging homeowner equity of their existing house to acquire an investment asset.
Debt recycling strategies are there to help you start repaying non-deductible debt, such as your house loan, as fast as possible while simultaneously helping you grow your assets in a tax-effective manner throughout time.
Debt Recycling Explained
Debt Recycling makes use of your equity as collateral for a different investment loan. It utilizes your investment returns and tax relief, including excess cash flow, to pay down your outstanding house loan debt. Afterwards, it re-borrows the money you used to pay down your house loan from the money you borrowed to buy new investments.
Non-deductible debt is a loan taken out to purchase a non-income producing item. When the return on debt is recycled, the non-deductible mortgage shrinks while the investment loan grows. Eventually, you’re left with little more than tax-deductible money borrowed.
Is Debt Recycle Worth It?
Debt recycling offers a few advantages that make it worthwhile. Here are a few prominent benefits:
- This strategy assists in converting non-deductible debt into tax-deductible debt. Home loan interest is not tax-deductible; however, investment loan interest is generally deductible.
- You are accumulating growing assets simultaneously while paying off your mortgage, Instead of waiting till you have paid it off.
- You may pay off your loan quickly, lowering the interest you pay on your mortgage. You also have the chance to generate a passive income from your assets.
You can find out more in-depth about depth recycling on the community posts of the ATO official website. There are debt recycling calculators online that can help you to find out the total repayment and the estimated tax return. But debt recycling can be risky since you are utilizing borrowed money to invest. We suggest you take help from professionals to figure out which strategy is the best for you.