What is Good Debt versus Bad debt?
Often we are raised from a young age to consider all debts as bad. This could well be true if you use debt to purchase non-investment items, lifestyle goods or for travel and leisure. However at Foundation Financial Advice we believe some debts that are used to create long term wealth or are secured against appreciating assets can be great! This is because loan interest incurred to create wealth through borrowing to invest is generally tax deductible.
Driving down “bad” debt is only one part of the equation. We make sure you have the right debt structure to increase the likelihood to both build wealth and own your home sooner.
Contact us for a chat to evaluate if you want to find our if you are suitable to able to recycle your “bad” non-deductible debt into “good” debt, build your net wealth position and own your home sooner.
Changing Bad Debt to Good - Objectives which can be achieved through Debt Recycling
Debt recycling is a strategy which helps working Australians who want to pay off their home loans far sooner than otherwise. It enables you to:
1. Repay your home loan quicker saving large amounts of interest.
2. Increase wealth in an investment environment outside of superannuation.
3. Maximise tax deductions each year, saving you tax.
Who could benefit?
Anyone who has a home loan with equity, on a medium to high taxable income and wants to start investing for the future now, whilst also saving tax. We advise clients who have a reasonable period to retirement and a healthy (growth) appetite for risk that this may be suitable. Foundation Financial Advice can assist you in this process end to end and monitor the effectiveness so you can create a pathway to wealth.
What are the mechanics?
Debt Recycling involves 3 keys steps:
1. Unlock your equity and use the funds as security for a separate investment loan. This could be through a Share Portfolio, through the use of Investments and ETFs or via another Property purchase.
2. Utilise the new investments income, dividend, distribution or rent and any tax savings you receive from your investments (as well as any surplus cash flow) to reduce your outstanding home loan balance
3. Throughout the year, re-borrow from your investment loan the amount you have paid off your home loan to purchase additional investments. Massaging and optimising the tax effectiveness. Deductible debt means you only incur a net expense of the interest rate multiplied by a factor of 1 minus your marginal tax rate. For example a 5% p.a. investment loan rate for an individual on a 39% p.a. marginal tax rate would equate to 0.61*5% or 3.05% p.a. only less any other tax savings associated with the investment.