Debt recycling

Foreign money, where we show you how to pay your home loan off in up to half the time of a normal bank loan. Welcome to the Crown Money Podcast. I'm Jessie Edge and I'm joined by Scott Harry. How you going, mate?

Pretty good, pretty good. And yourself?

Yeah, I'm good, I'm good. Just, you know, enjoying this very cold Melbourne winter that we're having.

Oh, now, I'm sure a bowl of.

Shiraz will warm you right up, won't it? Indeed. All right, we're going to jump straight into today's topic. We're going to talk about something that's interesting. It's called debt recycling. So can you just start us off with what the debt recycling actually is?

Sure. So debt recycling is around the premise of turning bad debt, your home loan debt, prime example, into good debt. And so what that really means is you've got, let's call it a $500,000 home loan. Your house is worth, let's call it a million. And so the name of the game is to pay this 500,000 off as fast as we possibly can. But what a lot of clients are doing is sort of waiting to the debt free before they start investing, which I think is not the greatest strategy when you could be investing at the same time as paying down your debt and turning that home loan into tax deductible debt, which I believe if you've got a tax problem, and a lot of our clients do, because they earn a lot of money, that could be a really good way to help reduce your tax, but also more importantly, increase your investment portfolio, which accelerates the date which you can retire.

Yeah, yeah, that's fantastic. And I think a lot of people think they need to get permission to use that money for other purposes or whatever it may be. You absolutely do not. You can, if you have a redraw facility, you can take that money out and use whatever you want. So you can put into shares, buy investment properties, whatever you want to do. The only thing we recommend is that you create a separate split for that amount. You. Because when it comes to tax time, it's all about the purpose of the money, not the security property, so not the house that's securing that money. And it's got nothing to do with it. It's like, what was that money actually used for? And so anytime you are investing money, we absolutely recommend you break off a separate split. So you can clearly say to your accountant at tax time, here's a statement for the split I used for investment purposes. And it's all Tax collectible.

Yeah. So let's put that into figures for our listeners. First and foremost, you got a $500,000 home loan. You're an average client of ours. You paid $30,000 off your principal in one year. Average Australians doing 10,000. So that 500,000 mortgage, you now only owe 470. And so debt recycling is taking that $30,000 you paid off your home loan and setting up a separate split, as Jess said, for an investment. So you have a 470 home loan and a $30,000 investment loan. That investment loan will be sitting at zero until you decide what investment you want to invest in. And you won't be paying any interest on it until you do use it. But you basically have a 470 home loan and a $30,000 investment facility. Now some people use that investment facility to put down deposits or stamp duty on investment properties. Other people use it for dollar cost averaging into index funds or ETFs. Other people use it to buy physical assets like gold or silver, whatever it may be. We're not giving you investment advice here. What we're saying is the cleanest, fastest way to actually turn your home loan into tax national debt is to pay off the bad debt. And as you're paying off the bad debt, redrawing those funds that you've paid off and then claiming the tax deduction on the interest that is incurred if and when you're using them for investment purposes. And what's the investment purpose? Anything that's income producing. And so everything that you're buying, shares that's producing dividends, you're buying property, it's producing rental income. As long as it's income producing, it's going to be tax deductible. And just ballpark figure here, if you've got a 30% tax rate and you are paying $1,000 worth of interest every single month, that then you're going to be getting close to $3,300 back a month as a deduction. And so most people are sort of seeing rates are pretty high. And so the debt recycling isn't as good as what it was obviously when we came off the 2 or 3%. Where I'm getting the money at 2 or 3%, I can then invest it into the average like index fund or share portfolio and it's going to pay 7%. And so, and I'm getting tax deductions on the interest I'm paying. Now the rates are a little bit higher. It's not as sexy. But this is a long term Strategy. I'm not talking about just doing this for one year. I'm talking about doing this every single year until you paid your house off. So that $500,000 debt in 12 years is down to zero, but you've got a 500,000 investment facility at the end of that 12 years. Yeah, that's the name of the game.

And, and, and what, and what to invest in, when to invest in. And you know, whether paying off debt or investing is the right strategy at that particular time is absolutely conversation you need to. Need to have with a financial planner or advisor. But it's just we're talking about the facility itself and you absolutely can turn that into investment debt very quickly and easily. So it's probably one of those things you do maybe yearly. Like you might, you know, see what you paid off for the year and then you convert that into invested debt and request the change in the loan splits and. Yeah, so anything more than that, it might just get a little bit annoying from an admin perspective, that would be the only thing I would say.

Depends on how fast you're paying your home loan off. Right. I mean, we got some clients. I just saw a report for a client go out last week where a paid off was $80,000 off their home loan in six months. What an animal.

Reddable, isn't it?

What an animal.

In that particular case, definitely be debt recycling a little bit faster than yearly.

Yeah, I mean, it's like quarterly to six monthly, for sure. I mean, phenomenal result. Like, it takes a lot to surprise me these days after 23 years, but when I saw a client pay off 80,000 in six months, I was, wow. And there was no lump sums. It was just pure, like debt reduction. Obviously earning really good incomes, but nevertheless, their savings rate was through the wood. Right?

Y. Yeah. So so often we see people with these big incomes, but their savings rate is nothing. They're spending everything they have access to, which is just insane.

That's why I created the savings rate as a metric for our clients. Because I had a lawyer who was earning $440,000 a year and he was paying off 40 grand a year and I was doing backflips and cut was like, wow, great month, great year, well done. You've paid 40 grand off the home loan. And then I had a single mom on a single income with two kids who paid off 20,000 a year and her income was like 100 grand. And so double. I was. I was obviously happy with the lawyer who paid off 40 grand. But then I thought, hang on a second. She's saved 20% of her income. He's only saved 10% of his income. I need a pro rata this based on people's income to spending. And so that's where the savings rate basically came from, is I just had that exact scenario happen. And I should have been clapping and cheering the single mom. She was doing way better. But I looked at the dollar amount of debt reduction, not the what percentage of income they save. So savings rate, in case any of you guys are new and haven't heard us bang on about this before, it's what percentage of your income are you keeping? I do not care what you earn. It's irrelevant. It's what you keep, what you earn that's important, that we call it a savings rate. If you earn $10,000 per month and you spend 8,000, you have a to 20% savings rate. You're saving 20 cents in every dollar you earn. And so as a result of that, that's what we measure for our clients. We want that continually increasing and improving year on year. Our savings rates are increasing, our debt reductions increasing, and more importantly, the amount of interest we're paying a home loan every single month decreases.

Yep. Perfect. That's awesome. So, a little quick snapshot into debt recycling. Thank you so much, Scott. I will see you again next week.

See you soon.