This is one of my personal favourites. Debt optimisation (sometimes referred to as “Debt Recycling”) is a financial strategy which creates wealth over time and improves an individual’s debt structure. Achieved in the majority of cases by:
– Using all surplus income to reduce the home loan (non-tax deductible “bad debt”);
– Creating or increasing investment debt (tax deductible “good debt”), by drawing against equity in the home; and
– Using this borrowed money to build an investment portfolio.
It is a great strategy that can be adapted to suit your goals and time horizons; though it is important to note that borrowing money to invest and budgeting are key components.
Here is an example of how the assets and cash flow involved in a debt optimisation strategy using a “split loan”:
Where suitable, it is possible to extend on the strategy above by using the newly created investments as security for a margin loan, with the proceeds used to further invest. In this type of strategy, the interest costs are still generally met from the home loan, with investment income also used to reduce the home loan balance.
Using a strategy like this allows you to decrease your bad debt over time and replace with debt that can be used tax effectively whilst building an investment portfolio that can be used to help fund your goals.