(03) 9020 2905Sssh! Bite your tongue! Be wary of inviting hippies into any financial discussion. Imagine the world’s economy if Neil from The Young Ones was in charge of Treasury?
Debt recycling is based on the premise that tax-deductible debt is cheaper to service than debt on which there is no deduction.
Example: take a debt of $500,000. Household One has a $500,000 home mortgage. Household Two has a $200,000 home mortgage and $300k of investment debt. Same total debt.
However, the real after-tax cost of servicing the debt for Household Two could be as much as 28 per cent cheaper (depending on tax brackets) because of tax deductions on the investment debt.
“Cool, so how the heck do I do that?”
Let’s assume a 40-year-old couple who have a $600,000 home with a $400,000 mortgage. They’ve also built up (or inherited) a $200,000 share portfolio. One possibility for debt recycling would be to sell the share portfolio and pay down the home loan by $200,000.
Then they could borrow $200,000 to buy back the shares. They would now have $200,000 of debt on the home and $200,000 of investment debt for the shares. It’s the same total debt, but the servicing cost has fallen dramatically.
It’s not quite that simple and there are costs involved – including transaction costs and potential capital gains tax. See a financial adviser before doing it. But it can potentially save Gen Xers a lot of money and pay off your home loan faster.
Sadly, a tree might get killed in the process.
Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and a licensed financial adviser.