Today, a considerable part of our life involves taking loans or creating mortgages. And there’s no problem with it since it helps us get easier access to property and equipment. However, while this is great, a massive part of the process involves paying back the loan or paying off the mortgage.
Unfortunately, this process can be tricky, especially if not adequately planned. And this is where debt recycling comes in. It allows you to enjoy investment benefits as you pay off that mortgage. So, wondering how to pay off your mortgage in 10 years and invest at the same time?
What is Debt Recycling?
Although it appears to be complicated, it can be understood this way easily. It involves transforming your debt that’s non-deductible into a deductible one. It’s a great idea because it helps you lower your income that can be taxed. And this, in turn, means fewer tax payments for you. Fantastic right?
The only thing you need to keep in mind is that what determines the nature of the debt – tax deductible or otherwise – is the use of the debt. For instance, using your debt for personal purchases, like a car, isn’t tax-deductible.
Also, this isn’t always suited to everyone. To make this work for you, you’ll need to record a fair amount of income or savings every month.
Once you meet this requirement, you can then engage in debt recycling in several ways. And this includes a line of credit, interest-only loans, and principal and interest loans.
How Does It Work?
Again, this is another straightforward process. And it involves paying off your mortgage while also using that same money for other investment purposes, simultaneously. So, you access the equity in your property and then use it to invest in assets that produce income.
Are you confused? Don’t be. This strategy generally involves four steps.
Step 1: Utilise your home’s equity to create a new investment loan. (You can pick any of the method identified above).
Step 2: Invest the money realised from the credits in assets that can produce income, such as shares. You can do this directly or through any managed fund.
Step 3: Now utilise the money realised from the asset investment, including other surplus income to pay off your mortgage.
Step 4: At year-end, you can also borrow a sum equivalent to the amount you paid off on your mortgage. Take this loan from the investment loan, then use it to buy additional investment.
Note, you can now continue this process yearly until you complete the loan repayment. Also, it would be best to cover your income in case of disability or death. You can also include your loan repayments under the insurance.
Although debt recycling comes with some beneficial potential, it can be quite risky. And that’s why it’s best not to engage in debt recycling without the advice of a financial planner or expert.
If you find this strategy intriguing, you can contact us at Bearded Dragon Finance for an expert opinion.