There have been many attempted products in the past that attempt to create tax advantages or speed the reduction in the home loan balance. None of these have survived the scrutiny of the tax office.
There exists a principle that cannot be rejected, and that is the “Purpose Test” as defined by the tax legislation. Where the purpose of the borrowings is to create an income producing asset, then the costs associated with those borrowings (interest and other) will be deductible.
Debt recycling is a term used to describe the gradual shift of debt from the home loan to the investment loan part of the portfolio. It works like this:-
A person has a home loan of say $500,000. They pay the minimum principle and interest repayment of $2,432. But, they can afford to pay $3,432 per month. The extra amount of $1,000 is paid into the loan, reducing the balance of the home loan debt. Then, Monthly, quarterly or annually, the additional repayments are “borrowed” and invested into equities or property. When the amount is borrowed, the interest on that amount becomes tax deductible, and there is now another asset that provides a dividend and grows in value year after year.
In year 1 the home loan comes down from $500,000 to $488,000. The investment loan is $12,000 (we are still within our limit of $500,000 in total). In year two the home loan is down to $476,000 and the investment loan is up to $24,000, BUT, this investment should be worth more than this.
Over time this allows for the change in nature of the loan from non deductible, to tax deductible, and creates large assets. Some programs suggest the home loan debt would be nil in between 8 and 15 years depending on the investment.
This is a fantastic tool to speed the rate at which the home loan is paid off, but more importantly, it creates assets outside of Superannuation to assist with retirement planning.