Debt recycling

Debt recycling is a strategy where you use the equity in your home to invest in income-producing assets, such as ETFs (Exchange Traded Funds). This can potentially increase your wealth over time by allowing your investments to grow alongside your property value. However, it also involves taking on more debt, which carries its own risks.

Here are some considerations for each of your options:

1. Invest 100% in ETFs: This option focuses on potentially higher returns from the stock market but does not reduce your mortgage debt. It exposes you fully to market volatility, which should be considered against your risk tolerance and investment timeframe.

2. Invest 100% in your mortgage offset: This option reduces the interest payable on your mortgage, effectively providing a risk-free return equivalent to your mortgage interest rate. It’s a conservative approach, ensuring lower debt but missing out on potentially higher returns from market investments.

3. Split ⁵⁰⁄₅₀ between ETFs and offset: This balanced approach allows you to both invest in the market and reduce your mortgage interest. It helps in diversifying your strategies but dilutes the impact of each approach.

4. Start debt recycling and invest recycled funds in ETFs: Debt recycling can be a powerful strategy if managed carefully. It involves drawing equity from your home to invest in income-producing assets. The interest on the borrowed amount is generally tax-deductible if it’s used for investment purposes. However, it increases your overall debt level and requires careful management to ensure the investment returns exceed the cost of the new debt.

Given that you plan to upsize in 3-5 years, you should consider the implications of transferring recycled debt to a new mortgage. Typically, when you sell your home, the existing mortgage (including any recycled debt) would need to be settled.

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Hi Charlotte.

Based on my understanding, recycled debt can be transferred to a new property, if the loan accounts remain open. But if the loan accounts get closed when the current property is sold, then the new loan for the new property is basically fresh borrowings and so you would have to start the ‘recycling’ again.

Banks will sometimes let you keep a loan account open even after you sell a property if you let them hold the cash as security. They will also sometimes let you transfer a loan from one property to another. But it’s worth speaking with a mortgage broker about which banks will let you do that, since it’s not very common.

As for deciding between your offset and investing the money, that’s a personal choice. It basically comes down to whether you ultimately want to get rid of your mortgage payment or you’d rather invest for higher returns.

I wrote an article about this decision here, which you might find helpful: https://strongmoneyaustralia.com/mortgage-vs-...

As for dollar cost averaging, yes, you can still do that with debt recycling. I explain this in the following article on debt recycling, under the ‘Monthly debt recycling’ section: https://strongmoneyaustralia.com/debt-recycli...

Hope that helps.
Dave