You will no longer have access to additional lines of credit. There may be break costs associated with paying out your debts. We estimate these to be $X. You will need to apply for a higher amount of credit to consolidate your debt and approval is subject to the lender’s criteria. [No credit licence] We do not have a credit licence to provide advice on which lending product may be appropriate for your needs. You should seek specialist advice on this. The term of repayment for your consolidated debts may be longer than some of the individual debt terms. Changes in interest rates will impact the estimated outcomes of our advice.
26. Implement a Debt Recycling Strategy We recommend that you implement a debt recycling strategy:
Set up an investment line of credit on your home to purchase an investment portfolio. All income and tax savings generated by this investment strategy will be used to pay down your mortgage, freeing up further equity for you to invest. Over time, this strategy is designed to pay down your mortgage quicker and build an investment portfolio using borrowed funds.
We recommend an initial investment loan of $XX to combine with your cash/investments of $YYY to start your investment portfolio. Specific investment recommendations are outlined in more detail later in this SoA. We will review annually / quarterly / monthly how much you pay down your mortgage and then drawdown on your investment line of credit in line with this to build your investment portfolio. We estimate at the end of year 1, you will draw additional funds of $XXX to invest. Benefits:
Interest on investment debt is tax-deductible and borrowing for your home is not. Debt recycling allows you to build more tax-effective debt (and reduce the non-deductible debt) for the purpose of building an investment portfolio. We estimate that your home loan (non-deductible debt) will be paid off XX years earlier by implementing this strategy. Please refer to our financial projections at the end of the SoA for further explanation. Using debt to increase your investment portfolio gives you access to potentially more capital growth and income. Having a larger investment portfolio with the use of debt allows you to increase the diversity of investments which in turn reduces your risk by spreading the risk across different asset classes.
Points to Consider:
You will need to apply for an investment line of credit to enable this strategy. [No credit licence] We are not licenced to advise you on a particular product for your investment line of credit. Please seek specialist lending advice. Interest rates on investment lines of credit are higher than other loans such as your mortgage. The current variable rate is XXX% and the fixed rate for XX years is XXX%. We have looked at your cash flow to ensure that if interest rates are to increase by 3%, you could still afford to meet the repayments. Please refer to our financial projections at the end of this SoA for further details. Just as having an increased portfolio size can magnify your gains, they can also magnify your losses when the markets go down. Volatility in your portfolio will be higher. It is important that you are comfortable with this. A minimum of 7 years is recommended for this type of strategy. Interest rates are subject to change. [Variable rate] As the recommended rate is variable, the rate can change at any time. [Fixed rate] At the end of the fixed period, the interest rate may have changed significantly, impacting future cash flow. An annual / quarterly / monthly review of this strategy is critical to its success so that we can draw down further on your investment line of credit to top up your investment portfolio. Borrowing to invest requires strong cash flow to support the strategy. Costs can be significant if the strategy has to be unwound prematurely. Please contact our office for immediate review if your cash flow changes.
27. Establish a Loan Offset account We recommend that you open an offset account on your home mortgage account. This account will sit parallel to your loan so that you can deposit your salary and any other income. The value of your deposits will be offset on your loan balance,
21
