Our clients often ask us whether they should use their surplus cash flow to pay off their mortgage, or invest it to build their wealth.
While it is important to reduce your mortgage as quickly as possible to save unnecessary interest costs, it is also equally important to build wealth so that you achieve the things in life that are important to you. However, we often find that many people wait until their mortgage is paid off (or nearly paid off) before they start thinking about investing. The problem is that they only start investing later in life and therefore miss out on the valuable compounding effect over time.
One solution is to consider a ‘debt-recycling’ strategy whereby, as you pay down your home loan, you progressively redraw the equity for investment purposes.
How does debt recycling work?
- Use the equity in your home to establish an investment loan.
- Invest the borrowed money in a diversified portfolio of income-producing assets (such as shares or managed funds).
- Use the income from the investment portfolio to make extra repayments on the mortgage.
- At the end of each year as the home mortgage reduces, the investment loan is increased by the same amount and added to the investment portfolio. The process is repeated each year until the home loan is fully paid off. After that the surplus income can be used to acquire additional investments or pay off the investment loan.
What are the potential benefits?
- Pay off your home loan faster.
- Save large amounts of interest on your home loan.
- Reduce your tax by increasing tax deductions each year.
- Build wealth and income through investments.
Who is debt-recycling suitable for?
Financial strategies that involve borrowing money to invest need to be careful considered with professional advice.
To find out whether a debt-recycling strategy suits your needs and objectives please contact me, Brett Surman on 08 6169 0506 or email brett@demeterwm.com