Home loan savings: Cut your costs by thousands with this trick

Record-low interest rates have created a great chance for Aussie investors to adopt a debt strategy that makes them richer faster.

Recycling is all the rage as Aussies aim to improve the world, but have you considered debt recycling to improve your mortgage?

All you need is a home with equity in it, some income-earning investments and a little knowledge, and there’s the potential to make a huge dent in a home loan and its interest costs.

Debt recycling maximises investment loans, where repayments are tax deductible, and minimises mortgages that are not tax-deductible. All surplus income from a rental property or share portfolio gets funnelled into your home mortgage rather than repaying investment loans.

SmartMoney Wealth Management co-founder Peter Kaleski says record low interest rates have made it simpler to use this strategy because “it’s easy to get positive cash flow”, with share dividends and rents now typically higher than investment loan interest.

Peter Kaleski, co-founder of SmartMoney Wealth Management

“Debt recycling involves using equity from your home to invest in assets that give the possibility of growth and income, such as property or shares,” he says.

“Over time the income made from these assets can then be used to assist in paying off your home loan in addition to you making regular payments.

“If these investment assets go up in value, you can even sell them and potentially use the proceeds to pay down a large piece of your mortgage.”

CreationWealth director Andrew Zbik says debt recycling is “turning non-deductible debt into deductible debt”.

“For roughly every dollar you owe to the bank you will pay back $2 over a 30-year principal and interest mortgage, and – depending on your marginal tax rate – may have to earn $3 or $4 to pay off the loan,” he says.

“Where you decide to put your surplus income is totally your choice.”

Getting tax advice from an accountant is also a good idea, Zbik says.

CreationWealth director Andrew Zbik

A debt recycling plan could also involve sharemarket investors selling down their portfolio, transferring money to their home loan then repurchasing shares using borrowed money from their mortgage.

Even though there could be a capital gains tax bill from selling the shares, the savings from the debt recycling are often larger, Zbik says.

Kaleski says the three biggest benefits of recycling debt are:

• You pay off the home mortgage sooner.

• It creates tax benefits.

• You can build long-term wealth faster.

People thinking about recycling debt can educate themselves online, take some investment courses or seek professional advice, Kaleski says.

“Understand what you are doing because there’s risks involved,” he says.

@keanemoney