debt recycle strategy
- Thread starter r3ckless
- Start date
I also have the blessibg ti staybat hone for a further 5 years. When i eventually buy a ppor. Woukd this be feasible.. buy ppor for $500k. Lets assume i have loan for $400k... Now to debt recycle... Would it make sense to sell an existing investment. Repay the ppor (non deductible debt) and then take out a new loan swcured agaibst ppor to buy a new ip?
Considering doibg this solely to have only deductible debt. I understanf there could be cgt involved as well as solictor abd bank fees. But long term i should come out on top right?
Considering doibg this solely to have only deductible debt. I understanf there could be cgt involved as well as solictor abd bank fees. But long term i should come out on top right?
Yes, thats the entire point of it.
Say you have 400k PPOR house with 300k mortgage.
You have 50k spare cash.
You could NOT recycle it, ie use the 50k cash as deposit on a 250k IP. This would mean you'd have 200k good debt and 300k bad debt.
Or you COULD recycle it, pay 50k off the home loan, top it back up to the same value and use the equity as deposit for a 250k IP. This would leave you with 250k good debt 250k bad debt.
The hidden unsung benefit of this is that if you use the cash as the deposit, most banks will want that to be genuine savings, which is not always possible if it was a windfall, inheritance or drug profits. In the recycling scenario, because it's equity, there's no longer this requirement.
Say you have 400k PPOR house with 300k mortgage.
You have 50k spare cash.
You could NOT recycle it, ie use the 50k cash as deposit on a 250k IP. This would mean you'd have 200k good debt and 300k bad debt.
Or you COULD recycle it, pay 50k off the home loan, top it back up to the same value and use the equity as deposit for a 250k IP. This would leave you with 250k good debt 250k bad debt.
The hidden unsung benefit of this is that if you use the cash as the deposit, most banks will want that to be genuine savings, which is not always possible if it was a windfall, inheritance or drug profits. In the recycling scenario, because it's equity, there's no longer this requirement.
A structured debt recycle strategy has a couple more components to it including a small share portfolio, a loan strategy that ideally allows for global limit and loan limit splits without a new app.
Although implement able at home, best to speak to a planner
Ta
Rolf
Although implement able at home, best to speak to a planner
Ta
Rolf
In the process of recycling non-deductible debt by drawing equity out of our PPOR which we recently finished renovating and on top of that there has been upward movement in the market in our suburb. Reval the property and split the loan with one portion for the PPOR remaining non-deductible, and the equity loan portion which will be used as the deposit on an Investment property being deductible.
Win-Win. The renovation keeps the misses happy and it gives us equity to purchase another investment property which keeps me happy.
Win-Win. The renovation keeps the misses happy and it gives us equity to purchase another investment property which keeps me happy.
A common strategy I use with my clients is roughly as follows:
Highly geared PPR
IP with equity
both jointly owned...
We arrange for a spousal transfer, and "sell" say the husbands share of the IP to the wife. (Stamp duty free).
Without explaining in a detailed example, you are realising the equity in the IP (50% of it anyway) and a capital gain event, refinancing the IP it and shifting the equity onto the PPR, thus turning X amount of non deductible debt into deductible debt.
There are issues of CGT to worry about so a opportunity cost (interest deduction vs CGT payable) analysis has to be done.
This works especially well when say IP is owned 100% by Mr, he doesn't own any other property and looking to buy PPR with Mrs.
If Mr can escape CGT via main residence exemption the CGT issues are avoided.
I may have over simplified the scenario but I am just trying to highlight a strategy of debt shifting which is inexpensive
Highly geared PPR
IP with equity
both jointly owned...
We arrange for a spousal transfer, and "sell" say the husbands share of the IP to the wife. (Stamp duty free).
Without explaining in a detailed example, you are realising the equity in the IP (50% of it anyway) and a capital gain event, refinancing the IP it and shifting the equity onto the PPR, thus turning X amount of non deductible debt into deductible debt.
There are issues of CGT to worry about so a opportunity cost (interest deduction vs CGT payable) analysis has to be done.
This works especially well when say IP is owned 100% by Mr, he doesn't own any other property and looking to buy PPR with Mrs.
If Mr can escape CGT via main residence exemption the CGT issues are avoided.
I may have over simplified the scenario but I am just trying to highlight a strategy of debt shifting which is inexpensive
No. There is also a change of circumstance approach.
eg Wife owns marital home and debt is nil. They buy a new PPOR (50/50 TIC). They decide that hubby will buy 50% of wife's property at market. No CGT as MR exemption applies. Bank happy to do a loan at 50% LVR. No duty (NSW / VIC)...Hubby borrows. Give $$ to wife. Wife they pays down the new PPOR.
Hubby borrowed to acquire an interest in home - Deductible when it rented.
Its not necessary to look through at how the wife spends her share of the sale. Just so happens she pays down the non-ded debt even if it means waiting a month till its purchased. The banks are happy to do these things provided LVR's etc all stack up and there is no dodgy pricing etc.
Only stamp duty free for investment properties in Victoria. In NSW and other states it would be subject to duty. NSW applies an exemption for transferring from 1 name to both names 50/50 for the main residence only.
Of course - I'm based in VIC
The important thing is where the property is located.
I successfully recycled $500K of our $650k ppor loan into investment loans.
Now the wife says "why is our home loan balance still the same?, what have you been doing the last 9 years?"
BANG BANG BANG <insert sound of head hitting wall>.....
No surprises my claim I turned a $4000pm non deducable cost to a $3500 deductable cost got me nowhere.
To recycle debt it just takes
- other investments
- nobody to have to explain to
- time
Rolf, can you guess why I have trouble with joint loans now?....
Now the wife says "why is our home loan balance still the same?, what have you been doing the last 9 years?"
BANG BANG BANG <insert sound of head hitting wall>.....
No surprises my claim I turned a $4000pm non deducable cost to a $3500 deductable cost got me nowhere.
To recycle debt it just takes
- other investments
- nobody to have to explain to
- time
Rolf, can you guess why I have trouble with joint loans now?....
I would have told her that it isnt the same. "In 9 years we've reduced it from $500K to $0K (or whatever the numbers were), not many people reduce their homeloan to nil in 9 years honey". "Whats all this other debt then?", "Oh thats for the investment properties"
its like when da Mrs comes home and says look honey at the nice new dress I bought today.
It was on sale and I saved 200 dollars
Mans response, Great, lets add the 200 to an extra mortgage repayment...............wife asks what 200 dollars ?
ta
rolf
Why did not I think of that
....My only mistake was telling her what was happening.....seriously, the problem extends around the home loan being joint names and the investments mine only. Of course it was my money that paid down thr ppor loan. But logic, home loans and mariage don't always gel. Oh, and btw she is an accountant too.....
