Ask An Adviser - Is Debt Recycling Viable In High-Rate Environments? (1)

Top answer provided by:

Robert Goudie

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Thank you for your question. Let’s start with a quick overview on what debt recycling is all about. It’s a financial strategy where you gradually replace non-deductible debt (like a home loan) with deductible debt (investments loans). The deductible debt is used to invest into income producing assets like fully franked shares, which provide dividends that are then used to pay off the non-deductable debt. As your home loan reduces, your investment loan increases.

Now to answer your question. One of the primary goals with debt recycling is not necessarily reducing overall debt, but to reduce non tax deductible debt. This point makes it still effective in a high interest rate environment. In fact, it could be argued with higher interest rates, the need is greater to pay off non tax deductible debt faster.

In essence, while higher interest rates add an extra layer of consideration, the combination of tax advantages, potential for long-term growth, and the strategic use of fully franked dividends means debt recycling can still be a worthwhile strategy regardless of interest rates.

It should be noted that debt recycling typically plays out best over the long term. High interest rates may affect short-term costs, but the long-term growth potential of well-chosen investments can offset these.

As with all debt, whether it’s tax deductible or not, it should not be forgotten that debt represents risk and increases the chance of failure, whether that be a business or a household, so should be treated with the utmost respect. Just be sure to weigh up the risks and returns and seek personal financial advice.

While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.

Article by:

Rob Goudie

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