The Debt Recycling Strategy

Understand why paying off your mortgage quickly may not be a good strategy!

For people with home loans, the debt recycling strategy is promoted by many financial planners.

Essentially debt recycling strategy:

• directs surplus income each year to reduce the home mortgage
• at the end of the year, borrow back the increased equity and invest in a diversified share portfolio or rental property
• have earnings of the investment portfolio directed to reduce the home mortgage
• at the end of the year, borrow back the increased home equity and re-invest in the investment portfolio.

The aim of debt recycling is to more quickly reduce “bad” non-tax deductible and increase “good” tax deductible debt, thereby increasing a person’s wealth.

See this MLC flyer for an example of debt recycling.

At Archimedes Financial Planning, we investigate the merits of debt recycling deeply to demonstrate that it is not always a good strategy.

We show that the debt recycling assumptions (such as future mortgage rates and investment earnings) combined with the initial conditions (how much equity in a property; amount of surplus income) control whether and for how long such a strategy should be employed.

This is the benefit of the Archimedes analytical approach! We want to ensure your strategies are rigorously evaluated before making recommendations.