What is debt recycling?

Debt recycling is an investing strategy where an investor uses the equity in their home to release funds to invest. The aim of debt recycling is to pay off your home loan as quickly as possible, while also investing in other assets such as shares or managed funds.

With the right advice and guidance from a good financial planner, debt recycling can be an excellent way to reach your financial goals.

Ultimately, the goal of debt recycling is to pay off your home loan sooner and build wealth through investing. However, it’s important to speak with a financial advisor before making any decisions about debt recycling, as it’s not suitable for everyone.

The key to successful debt recycling is to make sure that you invest the money you save from your monthly payments into something that will grow over time. This way, you can pay off your debt and build your wealth at the same time.

Debt recycling can be a great way to build your investment portfolio without having to save up a huge deposit. It can also help you reduce your tax bill, as the interest on the investment loan is tax-deductible.

How do I start debt recycling

Basically the first step is the refinance an asset that has equity such as your home, or investment property.  Next you decide what you want to use the funds to invest in – but it needs to be in assets that will be likely to deliver a higher return than the loan interest rate from which you have borrowed – typically shares, managed funds or property.  You need to be comfortable with the amount of risk you are taking.

To do this, you first need to calculate your loan to value ratio (LVR). This is the amount of your loan compared to the value of your property. For example, if your property is worth $500,000 and you have a loan of $250,000, your LVR would be 50%. If your LVR is below 80%, you may be able to use debt recycling to release equity from your home.

To do this, you would refinance your home loan and take out a new loan for the amount of equity you want to release. For example, if you wanted to release $50,000 of equity, you would refinance your home loan and take out a new loan for $300,000. This would give you a new LVR of 60%. You would then use the funds from the new loan to invest in shares or managed funds. Over time, as your investments grow in value, you would hopefully make more money than it costs to service the interest on your new loan.

While debt recycling can be a great way to speed up the process of paying off your home loan, it is important to seek professional financial advice before implementing this strategy.

There are a number of benefits that come with debt recycling. For starters, it can help you to accelerate your investing journey by allowing you to take advantage of compound interest. This can be especially beneficial if you’re trying to grow your nest egg for retirement. Additionally, it can help you to diversify your portfolio and reduce your overall risk.

Of course, there are also risks associated with debt recycling. If your investment doesn’t perform as well as you’d hoped, you could end up in a worse financial position than you were in before. As such, it’s important to seek professional financial advice before making any decisions.

Overall, debt recycling can be a great way to boost your investing journey – but it’s not without its risks. So, make sure you weigh up all the pros and cons before making any decisions.