Debt Recycling

Debt recycling enables you to simultaneously pay off non-deductible debts (such as your home loan) and build an investment portfolio for your long term future goals.

Benefits of debt recycling

  • You can use the equity in your home to take advantage of market opportunities now, rather than waiting for your mortgage to be repaid.
  • You will be diversifying your investments outside of the family home.
  • Building an investment portfolio now allows it to benefit from the power of compounding and long term investment growth.
  • Regular investing means you benefit from dollar cost averaging, because sometimes you pay more, sometimes less, for your investment, so your average purchase price essentially evens out over time.
  • Your taxable income may reduce as your deductible loan increases.
  • Your home loan may be repaid faster.
  • You will be able to access your investment portfolio if necessary.

How debt recycling works

 To use debt recycling, you need an existing home loan (or other non-deductible debt) and an investment loan. Your investment loan should be structured as an interest only loan and the funds invested in income-producing assets, such as managed funds or shares.

To implement the strategy, you arrange for all of your investment income to be directed to your home loan in addition to your regular repayments. The extra repayments increase your equity in your home, allowing you to increase your investment loan by the amount you’ve repaid on your home loan. This additional money is then used to increase your investment portfolio.

Over time, as your investment portfolio grows, so does your investment income and the amount you can use to repay your home loan.

Structuring your investment loan as interest only means your repayments are less than if the loan was principal and interest which allows you to direct more of your cash flow to your home loan. The cost of an investment loan is usually tax deductible if the investment is producing taxable income for you, so the interest repayments on this loan can reduce the amount of income tax you pay.

You can revisit this strategy periodically, each time increasing your investment loan by the amount that has been repaid on your home loan with the additional money being used to buy more investments. This process can be continued each year until your home loan is fully repaid. After that time, you can use your surplus income to buy more investments or repay your investment loan.

Other things you should know

  •  Debt recycling is a high risk strategy – if your portfolio performs poorly, or if interest rates increase, you could face significant financial stress or even put your family home at risk.
  • Debt recycling involves gearing (borrowing to invest). You need to understand the risks associated with gearing before undertaking a debt recycling strategy.
  • All borrowing requires discipline. It is important not to over-commit as this will increase the likelihood that ongoing interest and loan repayments can be met.
  • Before making any changes to your loan, you should confirm with your lending specialist what fees and charges may apply if your loan is restructured or if you make additional repayments.
  • You should review your life insurance cover regularly as your debt and asset levels change. It is important to have sufficient cover to help meet loan repayments in the event that your income ceases because of illness, disablement or death.
  • Tax advice should be sought prior to implementing or making changes to investment related borrowings.

5 tips on holding Life Insurance through your SMSF

 

 

Holding your Life Insurance through your Self-Managed Super Fund can be an effective method to secure the future of yourself and your loved ones. The following tips may help:

 

1. Considering Life Insurance within your SMSF is actually a requirement by the ATO
Findings from the government’s Cooper review revealed that only 13% of self-managed super funds actually held any form of Life insurance. In response to this underinsurance gap the ATO made it a requirement for all trustees to at least consider life insurance in their strategy document or meeting minutes. This does not mean that trustees are required by law to hold life insurance within their SMSF, it does however mean to be compliant with the ATO, it must be documented that consideration was given to life insurance within the fund.

 

How we can help: We can provide you with the right information to pass onto your SMSF accountant in order to ensure your SMSF remains compliant in this area.

 

2. Cash Flow Benefits
Since your SMSF owns the policy, it will fund the premiums. This can free up your cash flow, especially for times when money is tight or when you have more pressing financial priorities. It can be beneficial however to implement a contributions plan in order to avoid the eroding effect insurance premiums can have on your retirement savings.

 

How we can help: We can assist you in either transferring your current policy into your SMSF or advise on an alternative policy to undertake should this be appropriate for your situation.

 

3. Tax Efficiency
Tax savings can be achieved by funding your insurance premiums via pre-tax dollars through salary sacrifice and personal tax-deductible super contribution strategies. This effect is magnified for those in the higher tax brackets in reducing taxable income.

 

How we can help: We can provide you with specialist advice as to a contribution plan to avoid retirement savings erosion and to reduce taxable income.

 

4. Protect your assets within your SMSF
Life insurance within your SMSF can help avoid the sale of valuable assets such as property should something happen to a member. Not having the right insurance in place could have a major effect on the liquidity of the SMSF, as the death or TPD of a member is unpredictable and the consequences could be damaging to the other members.

 

How we can help: we can provide you with a review of your current cover and make recommendations based on your needs to cover any risk in this area.

 

5. Protecting Members
The underlying motive behind the requirement for members to consider Life Insurance in their SMSF’s is to prevent members from being underinsured. Putting in place the right amount of cover for your situation can help protect yourself and your loved ones from financial strain should something tragic happen.

 

How we can help: If you don’t know how much cover you need let us provide you with recommendations for appropriate levels of cover so that your financial future cannot be hindered by a devastating injury or illness.

 

 

The information provided in this document, including any tax information, is general information only and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial situation or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. From time to time we may send you informative updates and details of the range of services we can provide. If you no longer want to receive this information please contact our office to opt out.