Debt recycling: How does it work, and what’s the role of mortgage brokers in it
Imagine you are borrowing a home loan and keep paying it till you clear your loan and interest. The whole portion of the loan you paid is non-deductible debt, which means you pay the interest and borrowed amount without any tax deductions.
But when you can recycle the debt, from non-deductible to tax-deductible investment debt, you can structure your finances better and also avail tax deductions for the loan you borrowed.
Also, as cash rates are always on the higher side, mortgages need to be carefully planned so that borrowers make the most of the current scenario.
What exactly is debt recycling?
Let’s understand this with an example,
A person buys a property worth $800,000
The loan he borrowed is $500,000
This person will now partially repay the loan, reducing the non-deductible loan amount from their savings or against the equity of the property.
He repays $100,000
And borrows $100,000 again as an investment loan and invests in income-generating assets.
The interest on investment loans is tax-deductible (if structured under ATO rules), and the returns generated from investment-giving assets are utilised to close the remaining loan more quickly.
Through debt recycling, the mortgage holder can achieve faster debt repayment, tax benefits, and generate better returns.
And with rising cash rates, investing in higher-yielding avenues such as money markets and bonds can help them generate higher returns.
This approach also carries risks, as the borrowed debt, used as an investment loan, is invested in avenues that may be affected by market volatility, complex loans, and tax obligations.
Role of mortgage brokers in debt recycling
The process of debt recycling is planned and strategised by a financial planner or a tax accountant. But the role of a mortgage broker is undeniably crucial here.
So, how does a mortgage broker assist here?
The broker will,
- Clearly split the loans based on their purpose (which is for a home loan and which is for an investment loan)
- Help refinance the mortgage by utilising the available equity.
- Optimise the loan structure by enabling access to competitive interest rates.
- Altogether, the brokers structure the loan properly, which helps financial advisers to strategise investment options for their clients.
Can additional support add value to the work mortgage brokers do?
Yes, it does.
The outsourcing team can help mortgage professionals maintain loan documents clearly, process applications, manage loans through closure, stay compliant with ATO and APRA, ensure audit accuracy, and free up admin, follow-ups, and data-validation tasks so mortgage professionals can focus on restructuring or recycling debt. While the cash rate keeps changing, a streamlined mortgage broker support can help mortgage brokers restructure and recycle the debt for their borrower clients more effectively
