Indeed! I suspect it's under-utilised because it can seem a bit confusing, but with the right roadmap it's actually fairly easy to understand/implement.
If your house was pretty much completely offset and you wanted to invest into ETFs. Would you just invest cash and let it build up over time or would you debt recycle some offset funds to purchase more ETFs quicker?
@@mitchroberts6290 thanks for the question, it depends how much you want now and in the future. If you wanted to invest now and doing so would require you to take funds out of the offset and would be paying interest again, it would be best to debt recycle. If you want to keep home fully offset and just invest surplus funds now and in the future, under most scenarios it doesn't matter and can just invest cash. With that said, if you have the equity and willing to do admin effort, you can't go to wrong borrowing to invest and keep cash (you otherwise would invest) against the loan offset. This futureproofs in instances where you might buy another home in the future :)
Great video. Thanks. One thing that confused me was that you say at 4:25 that debt recycling doesn't mean you borrow more. But the equity loan example you gave does increase your total borrowings from $500k to $600k. The cash example has the total borrowings constant at $500k.
Thanks for the question :) It's a good question and I'd add for clarification "you're not borrowing more than you would otherwise if you were just to invest cash out of the offset account". This is because by investing cash, whilst you have a mortgage, you're effectively borrowing that as your mortgage could be that much lower otherwise. Hope that clears it up but when comparing the examples and overall debt levels, I refer to and I'd always focus on net loan amounts, after accounting for the funds offsetting those loans. This is the most important figure as it's the figure you pay interest on :)
@kyle.edvest thanks for your response. That makes sense. Given the cash example has lower overall debt (not net debt) than the equity example, it might be worth taking into account that the LVR for the cash example is lower so you may be able to get a lower rate from your lender compared to the equity example. Keep up the good work. Subscribed.
@@Brosa190 thanks and is a good point! The offset example is only really required if ever turned into investment property. If there's a no to low chance of this occurring, you wouldn't want to be stung the extra rate for a what if :)
@@kyle.edvest Hi Kyle. Sorry - back to this one. In the video you state that the equity approach "future proofs" if PPOR becomes an IP. In your reply above you state that the offset approach is used if PPOR becomes an IP. Can you clarify which approach you're suggesting is more suitable for future-proofing an PPOR becoming an IP? And how do these approaches differ (other than the equity approach has $100k more bad debt and $100k more offset) in the context of a PPOR becoming an IP? Also, I am not sure how the "extra rate" you mentioned comes into these situations.
@@Brosa190 Recognise the confusion (sorry) but am referring to the same scenario e.g. Keep funds in offset and take equity, presuming you have the equity. This is instead of using the cash or offset to pay down the loan and create equity. If you don't have the equity, unfortunately you need to do the latter, or a combination depending on your equity position and borrowing capacity. By not paying into the loan (rather keeping in offset) you've preserved the value of the current loan which will become a good debt (and want to maximise). Hard to calculate the right decision as a lot of variables and assumptions with time etc. But the benefit annual benefit once it becomes a good debt is = amount preserved x assumed interest rate x marginal tax rate x how many years will hold the debt eg 100k @ 6% of 39% mtr over 7 years = $16,380. So you'd want to make sure you're not paying more additional interest than that until it's turned into an investment property :)
@@tmbara paying down the mortgage (or building offset) and investing once done is a perfectly valid strategy too if in risk profile and more attractive to many now given where interest rates are. Or a combination :)
Thanks for watching! It would really depend on your situation, but here are two of my past videos that may be relevant for 18-25 year olds: 1) Low-cost diversified ETF portfolios - ruclips.net/video/eCeWkxwGglM/видео.htmlfeature=shared 2) Best high-interest savings accounts - ruclips.net/video/AIgzt-mmUXY/видео.htmlfeature=shared It's great that you're interested in investing while young. When you start early, the benefits of compound interest are on your side. Best of luck!
Unfortunately, if your on the lower tax rates it doesn't work as the difference between getting a loan on your property and the amount you'll make on dividends doesn't make financial sense.
Hi and thanks for the comment. You're right that the higher your income, the more effective debt recycling is. However, if you’re earning more than the effective tax-free threshold ($22,575) and you’re already planning to invest anyway, investing with debt recycling will always save you tax. Feel free to play around with different income levels on the calculator to test for yourself :)
As Kyle said, will always save tax, plus franking credits. Also, lower income is generally not forever, meaning as income grows over 10-20 years, so does the deduction
@@Nerdificationing Investing vs paying off mortgage (by keeping in offset) does increase risk as you're exposing yourself to the market vs the guaranteed return of your interest rate. Historically investors have been rewarded for taking this risk however there are periods where the justification of the decision is longer therefore is crucial is a long term strategy. Fortunately it doesn't have to be one or the other rather you can control the amount to invest and risk to take. For some it may be $0, for others the amount of offset, for others on high high risk spectrum may be offset plus equity release. If you were to invest anything, it would be worth debt recycling however and funding investment with debt/equity vs cash.
@@kyle.edvest Thanks! can you elaborate on the last bit? If I now have an extra 100k in cash, why would it be better to recycle 100k from the offset vs using the cash? If I recycle I'd be tax deducting the 6% interest, but with cash I'd be paying no interest?
@@Nerdificationing Sorry, not full story as didn't know you had more than the loan in the offset account. In this case there would be no current benefit in structuring debt so you could just invest the cash that is in the offset that's over offsetting the loan. Again, no immediate benefit, but if there's a chace in ever upsizing, and you have the borrowing capacity and willing to go through application, you could borrow the additional $100k against the home, use these funds to invest and out $100k that's currently over offsetting the loan against this new loan. If you ever needed the $100k for personal reasons/buy another home and you need the funds, you can take out of the offset account and the interest is deductible vs if you borrowed it after the fact (having invested the cash) it wouldn't be as was for personal purposes. Hope makes sense :)
Thanks for the comment! Debt recycling works by converting non-deductible debt into tax deductible debt. Since the mortgage on an investment property is almost certainly already tax deductible, there's nothing to convert and doing so would make your deductible debt level exactly the same. So debt recycling only works on non-deductible debt, which is almost always against the main residence.
You can and you've still borrowed to invest and can deduct the portion of interest. However, you've created a mixed loan and the calculation of the portion doesn't remain fixed (assuming P&I), so it's an ongoing headache for you (and possibly your accountant). I'd advise to structure separately initially. This will save yourself time, stress, and possibly errors in the future.
@@dzhiurgis it's outside my jurisdiction and expertise however it'd be worth looking into and potentially getting local advice based on my general understanding of deductibility of interest in NZ on your home vs for investment purposes.
Without knowing your situation (tax, cost base, VAS value, mortgage value) it's hard to say definitely however when working with customers it's often a consideration. You likely will have some capital gains tax to pay; however, the annual savings of debt recycling often will make up for the initial cost. One step backwards, 2 steps forward. To see how much you'd save, download the debt recycling calculator on edvest.com.au Just remember to avoid reinvesting in the same investment as doing a strategy for the sole purpose of tax savings is a no no. Fortunately there's plenty of quality alternate ETF's.
Hey Kyle , really nice video ! I was wondering if I could help you with more Quality Editing in your videos and also make a highly engaging Thumbnail and also help you with the overall youtube strategy and growth ! Pls let me know what do you think ?
Hi hope you are well, I visited your RUclips channel. Really nice video. I like it. i alrady subscribed. But your video SEO score is very low, Tags, descriptions, and titles are not perfect, If you want to grow your channel and increase your video views, and subscribe. then video SEO is very important. your channel will get organic traffic, increase subscribers & views for Monetization, videos go viral and your channel will go to the top rank on RUclips. if you really want improve your channel then you should fixed below issues 1.vidio seo 2.titel 3. video tag 4. nice thumbnail 5.channel intro video 6.channel banner 7.full channel setup
Debt recycling is so beneficial. I’m surprised it’s not a more well-known strategy
Indeed! I suspect it's under-utilised because it can seem a bit confusing, but with the right roadmap it's actually fairly easy to understand/implement.
Thanks mate, Nice video very informative
@@VikramG9 Thanks Vikram :)
If your house was pretty much completely offset and you wanted to invest into ETFs. Would you just invest cash and let it build up over time or would you debt recycle some offset funds to purchase more ETFs quicker?
@@mitchroberts6290 thanks for the question, it depends how much you want now and in the future. If you wanted to invest now and doing so would require you to take funds out of the offset and would be paying interest again, it would be best to debt recycle. If you want to keep home fully offset and just invest surplus funds now and in the future, under most scenarios it doesn't matter and can just invest cash.
With that said, if you have the equity and willing to do admin effort, you can't go to wrong borrowing to invest and keep cash (you otherwise would invest) against the loan offset. This futureproofs in instances where you might buy another home in the future :)
Great video. Thanks.
One thing that confused me was that you say at 4:25 that debt recycling doesn't mean you borrow more. But the equity loan example you gave does increase your total borrowings from $500k to $600k. The cash example has the total borrowings constant at $500k.
Thanks for the question :) It's a good question and I'd add for clarification "you're not borrowing more than you would otherwise if you were just to invest cash out of the offset account". This is because by investing cash, whilst you have a mortgage, you're effectively borrowing that as your mortgage could be that much lower otherwise.
Hope that clears it up but when comparing the examples and overall debt levels, I refer to and I'd always focus on net loan amounts, after accounting for the funds offsetting those loans. This is the most important figure as it's the figure you pay interest on :)
@kyle.edvest thanks for your response. That makes sense.
Given the cash example has lower overall debt (not net debt) than the equity example, it might be worth taking into account that the LVR for the cash example is lower so you may be able to get a lower rate from your lender compared to the equity example.
Keep up the good work. Subscribed.
@@Brosa190 thanks and is a good point! The offset example is only really required if ever turned into investment property. If there's a no to low chance of this occurring, you wouldn't want to be stung the extra rate for a what if :)
@@kyle.edvest Hi Kyle. Sorry - back to this one. In the video you state that the equity approach "future proofs" if PPOR becomes an IP. In your reply above you state that the offset approach is used if PPOR becomes an IP. Can you clarify which approach you're suggesting is more suitable for future-proofing an PPOR becoming an IP? And how do these approaches differ (other than the equity approach has $100k more bad debt and $100k more offset) in the context of a PPOR becoming an IP? Also, I am not sure how the "extra rate" you mentioned comes into these situations.
@@Brosa190 Recognise the confusion (sorry) but am referring to the same scenario e.g. Keep funds in offset and take equity, presuming you have the equity. This is instead of using the cash or offset to pay down the loan and create equity. If you don't have the equity, unfortunately you need to do the latter, or a combination depending on your equity position and borrowing capacity.
By not paying into the loan (rather keeping in offset) you've preserved the value of the current loan which will become a good debt (and want to maximise).
Hard to calculate the right decision as a lot of variables and assumptions with time etc. But the benefit annual benefit once it becomes a good debt is = amount preserved x assumed interest rate x marginal tax rate x how many years will hold the debt eg 100k @ 6% of 39% mtr over 7 years = $16,380. So you'd want to make sure you're not paying more additional interest than that until it's turned into an investment property :)
What about not having debt at all
@@tmbara paying down the mortgage (or building offset) and investing once done is a perfectly valid strategy too if in risk profile and more attractive to many now given where interest rates are. Or a combination :)
Bro, please make a video of an age group between 18-25 where these people invest their money? Like stocks, buy property or something else...
Thanks for watching! It would really depend on your situation, but here are two of my past videos that may be relevant for 18-25 year olds:
1) Low-cost diversified ETF portfolios - ruclips.net/video/eCeWkxwGglM/видео.htmlfeature=shared
2) Best high-interest savings accounts - ruclips.net/video/AIgzt-mmUXY/видео.htmlfeature=shared
It's great that you're interested in investing while young. When you start early, the benefits of compound interest are on your side. Best of luck!
Unfortunately, if your on the lower tax rates it doesn't work as the difference between getting a loan on your property and the amount you'll make on dividends doesn't make financial sense.
Hi and thanks for the comment. You're right that the higher your income, the more effective debt recycling is. However, if you’re earning more than the effective tax-free threshold ($22,575) and you’re already planning to invest anyway, investing with debt recycling will always save you tax.
Feel free to play around with different income levels on the calculator to test for yourself :)
As Kyle said, will always save tax, plus franking credits. Also, lower income is generally not forever, meaning as income grows over 10-20 years, so does the deduction
I have the remainder of my loan fully offset. So I pay only principal each month. Is it worth debt recycling? Or is that risky?
@@Nerdificationing Investing vs paying off mortgage (by keeping in offset) does increase risk as you're exposing yourself to the market vs the guaranteed return of your interest rate. Historically investors have been rewarded for taking this risk however there are periods where the justification of the decision is longer therefore is crucial is a long term strategy. Fortunately it doesn't have to be one or the other rather you can control the amount to invest and risk to take. For some it may be $0, for others the amount of offset, for others on high high risk spectrum may be offset plus equity release. If you were to invest anything, it would be worth debt recycling however and funding investment with debt/equity vs cash.
@@kyle.edvest Thanks! can you elaborate on the last bit? If I now have an extra 100k in cash, why would it be better to recycle 100k from the offset vs using the cash?
If I recycle I'd be tax deducting the 6% interest, but with cash I'd be paying no interest?
@@Nerdificationing Sorry, not full story as didn't know you had more than the loan in the offset account. In this case there would be no current benefit in structuring debt so you could just invest the cash that is in the offset that's over offsetting the loan.
Again, no immediate benefit, but if there's a chace in ever upsizing, and you have the borrowing capacity and willing to go through application, you could borrow the additional $100k against the home, use these funds to invest and out $100k that's currently over offsetting the loan against this new loan. If you ever needed the $100k for personal reasons/buy another home and you need the funds, you can take out of the offset account and the interest is deductible vs if you borrowed it after the fact (having invested the cash) it wouldn't be as was for personal purposes. Hope makes sense :)
It does not have to be your main residence does it, if you own an investment property with a mortgage can this not be the same process
Thanks for the comment!
Debt recycling works by converting non-deductible debt into tax deductible debt. Since the mortgage on an investment property is almost certainly already tax deductible, there's nothing to convert and doing so would make your deductible debt level exactly the same. So debt recycling only works on non-deductible debt, which is almost always against the main residence.
Is it ok to just redraw and calculate the portion of interest relating to the redrawn amount for tax purposes?
You can and you've still borrowed to invest and can deduct the portion of interest. However, you've created a mixed loan and the calculation of the portion doesn't remain fixed (assuming P&I), so it's an ongoing headache for you (and possibly your accountant).
I'd advise to structure separately initially. This will save yourself time, stress, and possibly errors in the future.
Can you do this in NZ?
@@dzhiurgis it's outside my jurisdiction and expertise however it'd be worth looking into and potentially getting local advice based on my general understanding of deductibility of interest in NZ on your home vs for investment purposes.
I recently bought Vanguard's VAS ETF. Should I sell it and use this strategy?
Without knowing your situation (tax, cost base, VAS value, mortgage value) it's hard to say definitely however when working with customers it's often a consideration. You likely will have some capital gains tax to pay; however, the annual savings of debt recycling often will make up for the initial cost. One step backwards, 2 steps forward.
To see how much you'd save, download the debt recycling calculator on edvest.com.au
Just remember to avoid reinvesting in the same investment as doing a strategy for the sole purpose of tax savings is a no no. Fortunately there's plenty of quality alternate ETF's.
Hey Kyle , really nice video ! I was wondering if I could help you with more Quality Editing in your videos and also make a highly engaging Thumbnail and also help you with the overall youtube strategy and growth ! Pls let me know what do you think ?
Hi hope you are well, I visited your RUclips channel. Really nice video. I like it. i alrady subscribed. But your video SEO score is very low, Tags, descriptions, and titles are not perfect, If you want to grow your channel and increase your video views, and subscribe. then video SEO is very important. your channel will get organic traffic, increase subscribers & views for Monetization, videos go viral and your channel will go to the top rank on RUclips.
if you really want improve your channel then you should fixed below issues
1.vidio seo
2.titel
3. video tag
4. nice thumbnail
5.channel intro video
6.channel banner
7.full channel setup