In the current high interest environment, "Debt recycling" is currently a popular strategy being promoted by financial advisers and institutions. A quick online search reveals it’s being marketed as a way to convert non-deductible home loan interest into deductible investment interest, helping homeowners pay off their loans faster while building an investment portfolio or generating additional income. While it may seem appealing, it's important to understand the details.
This strategy involves reducing or fully paying down your non-deductible home loan, then borrowing against the equity in your home to invest in assets like shares or rental properties. The income from these investments is then used to pay down the home loan, while the interest on the investment loan becomes tax-deductible. This can be particularly beneficial when investing in property or shares with franked dividends, as franking credits can offset some or all of the tax on your dividend income, and potentially on other income, depending on your circumstances.
There are different variations of "debt recycling." Some involve drawing on your home’s equity for investment, while others convert an offset account into one for investment income. Regardless of the approach, the key benefit is the ability to shift non-deductible home loan interest into deductible interest on an investment loan, while also generating investment income and paying off your home more quickly, saving many years off your mortgage.
However, it’s essential to understand the risks, particularly the possibility that if the investment market performs poorly, your lender may require you to repay the loan. In the worst-case scenario, this could mean selling your home or increasing your mortgage.
It’s advisable to consult a financial professional before proceeding with "debt recycling" to fully understand the tax implications and potential risks. This will help ensure you make an informed decision that aligns with your financial goals.
