Let me paint a picture. You own your home (well the bank does anyway). You probably paid a bit more for it than what you wanted to, but you love it. With that home comes a significant mortgage and significant repayment commitments.
Following your initial plan, you would want to pay down the mortgage before you retire so in addition to your monthly repayments you contribute any surplus cash flow to your home loan in order to pay it off earlier.
Once you’ve paid the house off, you will refocus your plan on saving for retirement in the few years you have left to work. Sound familiar?
“What if I presented a different picture?”
In this picture, you own the same home and you have the same significant mortgage repayments. However, in this version, you are not quite as focused on paying down your mortgage as early as possible but are more interested in growing your wealth before retirement rather than trying to build your nest egg in the final stage of your working life (when your mortgage is paid off).
In this picture, you use some of the equity that you have built up in your home and you establish a line of credit separate from your regular mortgage. You then use the funds from this line of credit and you invest into other assets.
In doing this, your debt will increase back to levels similar to your initial debt, but instead of the debt being a typical home loan debt that is non-deductible and not increasing your wealth, the line of credit will instead be fully taxed deductible and invested in income-producing assets (in the form of dividends) that will hopefully grow over time. In this picture, you then direct the dividends you earn from the investment, along with any tax savings and surplus cash flow back into your mortgage, resulting in decreasing this loan by more than you originally would have just by making the regular repayments in the first scenario. In the next year, you take this extra repayment you have been able to make into your e mortgage, and increase your line of credit by the same amount and repeat the process again.
“Over time, your home loan will be paid down faster than originally planned as your shareholdings increase and our dividends grow.”
Your line of credit will have increased as well. Over time, your overall debt position doesn’t change, but the location of your debt shifts from your mortgage to your line of credit.
The net result will be:
- No home loan mortgage (which is great as this wasn’t tax-deductible, to begin with);
- A line of credit that has grown to similar levels to your original home loan, and is fully tax-deductible;
- An investment portfolio that has hopefully grown significantly and is producing significant income streams in the form of dividends;
- A diversified portfolio of shares and property, rather than having all of your eggs in your own home.
Borrowing to invest is not for everyone and must be considered in conjunction with your risk profile i.e. the level of risk you are comfortable with. In addition, it is important to note that whilst borrowing to invest can magnify your gains, it can also magnify your losses. However, with historically low-interest rates, it may be a good time to explore a strategy of this nature.
WealthPartners can assist in exploring a similar scenario to the one described above the suitability to you and your family. Please contact me to arrange a time to discuss how implementing a debt recycling strategy may help you grow your wealth and achieve your financial goals sooner.
Source: Article written by Craig McGowen, WealthPartners.