Debt Recycling Strategy

Despite what you may have heard, a debt recycling strategy may not be the best option to increase your wealth.

What is Debt Recycling?

The aim of debt recycling is to more quickly reduce “bad” non-tax deductible debt (such as your home mortgage) and increase “good” tax-deductible debt (such as an equity loan for investment), to create wealth.

Here’s an example of a debt recycling strategy:

  • You use your surplus income to pay off your home loan as quickly as possible
  • At the end of the year, you can then borrow back the increased equity in your home and use it to invest (most easily in a diversified share portfolio).  These borrowings are tax deductible.
  • You then use the earnings from your investment portfolio to reduce the home mortgage more quickly,
  • At the end of the year, you borrow back the increased home equity and re-invest in the investment portfolio to create more wealth, and so on.

Is a debt recycling strategy the best option for me?

While a debt recycling strategy seems logical, it may not be the best option for you.  It’s important to look at the ratio of capital exposed to the home loan vs investment, as well as the return.  A small amount of capital getting a high return will not generate as much money as a large amount of capital generating a smaller return.  Most people only look at the rate of return and not the amount of capital exposed to that return and therefore the real income they will get.  In a nutshell, a debt recycling strategy may work for you if you have largely paid off your mortgage and have high equity in your home, with few other debts.

At Archimedes Financial Planning, we look at debt recycling risks and returns related to your particular situation to find out whether it is really a good strategy for you.

We’ve created our own proprietary calculator that tests debt recycling assumptions (such as future mortgage rates and investment earnings) combined with the initial conditions (how much equity in a property; remaining length of home mortgage; amount of surplus income) that helps decide whether debt recycling will work for you, and if so, when you should engage in it.

At Archimedes Financial we always ensure your investment strategies are rigorously evaluated before making recommendations.

Contact us today for a free, no-obligation review of your debts.

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