Debt recycling is a three-tiered financial strategy that aims to generate future wealth, reduce the home loan, and minimise tax. Debt recycling achieves this by using the current home loan equity to invest (in shares, property and managed funds), and in the process turns non-deductible family home debt into tax-deductible debt. For debt recycling to be effective it requires:
- Stable employment or business income.
- Tolerance for increased risk and debt levels.
- Long term investment focus.
The implementation process for debt recycling is:
- Consolidate debts (credit cards, car loans, etc.) into the home loan.
- Use equity in the family home as security for an investment purpose loan.
- Use the borrowed money to invest in an income producing asset (shares, property or managed funds)
- Use the investment income, plus tax savings from the geared investment, to pay off non-deductible debt on the home loan.
- Increase the investment- purpose loan by the same amount as has been paid off the non-deductible debt on the home loan.
- Repeat this process each year until the investment-purpose loan entirely replaces the non-deductible loan.