#Investing #Mortgage #DebtRecycling
Hey everyone! 💡 Let’s dive into the age-old debate: Investing versus paying off your mortgage early? 🏠💰 But wait, have you considered a third option – debt recycling? 🔄 Here’s a breakdown of how it works and why it could be a game-changer for you:
🔍 Debt recycling involves turning your non-deductible mortgage into tax-deductible investment debt.
📈 By investing in funds like Investnow, Kernel, or Simplicity, you can build wealth while paying off your mortgage faster.
💰 Claiming interest on borrowed money used for investing can lead to tax benefits, reducing your effective interest rate.
🧮 Calculate your potential tax credit by dividing deductible interest by your marginal tax rate.
So, what do you think? Is debt recycling the key to maximizing your financial gains? Share your thoughts and let’s discuss! 🤔💬 #FinancialStrategy #WealthBuilding #SmartInvesting
I don’t know if you can be bothered but it might be worth pointing out that if people do this using a revolving / overdraft facility (unlike what you’re suggesting with the fixed loan) then tracking the deductible portion will be hopelessly complicated. Not only because of what you have already mentioned but also the fact that any repayments which are then drawn out a second time to pay for private costs make those redrawn portions non-deductible and tracking that would be awful…
I thought it would treat the capital gains as income as you are ‘active’
How do you make sure this isn’t illegal tax avoidance?
Does the bank look at the shares as equity in this scenario or just treat the amount drawn for shares as additional lending?
I.e. if there was a stock market crash, would the bank come asking for extra equity? Like a margin call
I’ve learned about debt recycling recently from US-centric videos / blogs / articles. Thanks so much for opening up an NZ-centered discussion around this!
Let me summarize if I’ve understood correctly. I’ll try to make an example with super simple numbers.
Assumptions:
* I have a house worth 1 Million dollars
* I have a mortgage on that house of $500,000 (=LVR 50%)
* I have zero cash (to invest)
* I don’t want to go below an LVR of 60%
Rather than now using my income to slowly pay down the mortgage and maybe slowly use any leftover money to invest, I will:
1. Take out say $100,000 interest-only mortgage against my house (bringing my LVR to 60%)
2. Invest those $100,000 (in something that hopefully has a higher return than my interest-only mortgage)
3. The money I will earn will be
1. investment interest on the $100,000
2. minus mortgage interest on the $100,000, (but up to 33 / 39% of the mortgage interest will be tax deductible, depending on tax bracket)
Now I can take the extra money I’m making off the $100,000 I didn’t previously have access to and pay back my house’s mortgage ($500,000) faster.
Every time I pay back more house mortgage I increase my LVR, meaning I can borrow more against my house (while remaining at 60% LVR), giving me more money to invest.
Does that sound alright?
It would be good to get some info about how you unwind this later too.
E.g. what happens when you want to pay off the non tax deductible mortgages, how do you direct new income the following year (pay down interest only loan or pay off more principle), when do you sell investments or close the interest only loans etc.
I think that’s one of the things I’m still working through is figuring out what sort of additional lifetime of my loan am I looking at with this even if that additional time is making me money because my returns are greater than my costs to service the new debt.
What rate is a bank going to give you a separate fixed interest loan at though?
I don’t necessarily hate the idea, but it’s no good saying a 6.5% loan becomes 4.3% if a bank won’t do it below 10% (just an example. I’ve got no idea what the rate would be).
How likely is it that the bank would actually approve this?
You make a good point if investing in a portfolio of shares with FIF implications. While it might be a little cheaper to take out a mortgage on your house for this purpose, I feel the admin isn’t worth it relative to just using margin with a broker. I use IBKR and can take a leveraged position in the currency of the stocks I’m buying which also substantially reduces the FX risk. https://www.interactivebrokers.com/en/trading/margin-rates.php. For me taking 20% leverage makes sense long term with an expected return of ~9% in the S&P 500 for instance relative to funding costs of about 7%, particularly with the tax efficiencies. As an aside does anyone have an accountant they can recommend to help manage this scenario?
I like that you’re thinking outside the box, one point I’d note is that if you’re claiming the interest on your investing be prepared to pay the capital gain on any shares you sell that’s funded by this
This strategy is another non ring fenced, allowable tax deductible investment that’s quite clever in my opinion with the biggest caveat being that you really have to have the income to service the loan yourself (as opposed to someone else funding it through rent) & understand that you’re doing it for the long term.
Essentially you’re borrowing at an historical 6% average (4.2% after the deduction) and relying on an historical 9% average return. A 4.8% nett return over 20 years on 100 or 200k Is not to be sneezed at.
It’s quite risky in the event of job loss or medium term market downturn but so is owning a house in that scenario.
NEVER use leverage to buy stocks etc.
It is a stupid idea and you will lose most of your money.