Debt recycling is the process of replacing mortgage debt, or bad debt, with investment debt, which is known as good debt.
This strategy enables investors to start building wealth while they’re still paying off their home. As equity is built up in their home, funds are re-drawn and invested. Income from these investments can be used to further reduce the mortgage balance, while the growth component contributes to wealth accumulation.
This is how debt recycling worked for one couple.
Mark and Jane have built up considerable equity in their home, and upon advice from their financial planner decided to make that equity work harder for them. The couple currently owes $240,000 on their home, which is valued at $400,000. Their licensed planner recommends Mark and Jane implement a debt recycling strategy, refinancing their current loan to give them a $300,000 loan limit. This releases $60,000 of available equity for investment.
Mark and Jane’s planner recommends they invest their $60,000 equity into a portfolio of managed investments specifically chosen for income potential. After one year, their portfolio has grown in value to $65,000, and yielded an income of $4,000 which is used to reduce their mortgage further. After regular loan repayments, their mortgage balance is $230,000 after the first year. The couple then draw the extra $10,000 in equity to make an additional contribution to their investment portfolio. This process is repeated each year until their mortgage is extinguished.
Debt recycling can benefit investors prepared to invest not just funds, but also time and patience. To learn if it would be appropriate for you, contact your licensed financial planner.
To discuss debt recycling in action call (02) 4926 2300 or email us.