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  • Profile photo of wan0151wan0151
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    @wan0151
    Join Date: 2019
    Post Count: 0

    Hi everyone,

    I have a P&I mortgage on my PPOR of $160k as well as $160k sitting in my offset account. I’m familiar with the concept of debt recycling but I haven’t done it myself yet. Would it make sense to pay down the entire mortgage with the money in the offset account and then access that equity with a LOC to invest in stocks (index fund)? The interest rates on LOC at commonwealth bank is around 5% which makes this strategy a bit iffy. If interest rates were lower this would make a lot more sense given a 7% return on an index. Any suggestions would be greatly appreciated.

    Thanks everyone :)

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Hi Wan

    Yes it makes sense assuming you dont require access to the cash funds.

    You could always do say 100K interest only with 100K in the offset and a secondary loan split for the rest.

    In saying that CBA would have to be one of the least attractive lender for such a strategy.

    We do a lot of debt recycling for clients and would never use CBA for a variety of reasons.

    Cheers

     

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
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    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    It wouldn’t make sense to use a LOC. The existing loan could be utlised and tax deductibility achieved if done right

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of wan0151wan0151
    Participant
    @wan0151
    Join Date: 2019
    Post Count: 0

    What do you mean when you say existing loan? I thought tax deductibility can only be achieved on debt used to secure income producing assets. Can you clarify this?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    With debt recycling you pay down debt and then reborrow again, usually using the same loan.

    Yes you can only claim interest on money borrowed to acquire, or improve, an income producing asset.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of wan0151wan0151
    Participant
    @wan0151
    Join Date: 2019
    Post Count: 0

    Yes so in the example above, I pay down the entire $160k mortgage and then reborrow than same amount via a LOC to invest in stocks. Not sure why you say it wouldn’t make sense to use a LOC. Is it because of the high interest rate? What do you mean when say ‘usually using the same loan’?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    The rates on LOCs are generally very high and the term is generally at call.

    You can use a term loan just like a LOC.

    An alternative might be to use the LOC and then convert it to a term loan once fully used.

     

    Get some tax advice

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of Colin RiceColin Rice
    Participant
    @fms
    Join Date: 2011
    Post Count: 338

    Would it make sense to pay down the entire mortgage with the money in the offset account and then access that equity with a LOC to invest in stocks

    If you are intending to remain in the property as an owner-occupier then it makes sense as you are converting (recycling) non-deductable debt to deductible debt.

    You don’t need a LOC as per the reasons mentioned above and a term loan will work as long as you pay the debt down and then redraw the funds back into offset.

    Colin Rice | CDR Finance
    http://cdrfinance.com.au/
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    Perth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]

    Profile photo of wan0151wan0151
    Participant
    @wan0151
    Join Date: 2019
    Post Count: 0

    In this case, is there a difference between an equity loan and a term loan? Would an equity loan work as well as term loan in this situation?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    A LOC is generally at call and the limit can be cancelled.

    A term loan is generally for 30 years. There are differences in serviceability assessements too.

    One could work as well as the other, but one could also be better than the other. This is something you need credit advice on as it will different from lender to lender. I haven’t written a LOC loan as a broker in over 10 years, except for the $10k minimum with AMP

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

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