Seeking strategy to leave corporate world .../

Discussion in 'Share Investing Strategies, Theories & Education' started by hillsguy, 4th Jan, 2017.

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  1. twisted strategies

    twisted strategies Well-Known Member

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    hobo,

    indeed true ,

    when faced with a similar choice , i opted for a mix of shares and interest bearing debt ( which has mostly been redeemed now) and worked for employers and contractors a while longer .
     
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  2. wunderwhat

    wunderwhat Member

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    Is this a legit strategy? I've never heard of something like this before. Anyone tried this?
     
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  3. Simon Hampel

    Simon Hampel Founder Staff Member

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    Yes, this absolutely is legit.

    At one point there was a strategy which took it one step further and actually capitalised the interest on the investment loan so you don't make any payments on the investment to maximise the deduction (indeed, the loan balance increases over time as does the corresponding deductible interest) but instead you pay extra off the non-deductible PPOR mortgage to reduce that as quickly as possible.

    However, the ATO made some rulings which stopped a lot of this practice - basically there were investment "schemes" set up by spruikers specifically around this capitalising interest strategy which the ATO wanted to put a stop to - especially since the prime purpose of the scheme was to create a tax advantage rather than a legitimate investment strategy.

    Now it's my understanding that you can in some circumstances do the capitalisation thing - but you'd want to make sure you're getting good advice about how you structure things to ensure you don't lose deductibility and end up worse off than not having done it at all.

    The debt recycling strategy described by @trinity168 does not involve capitalising interest and is a perfectly reasonable and safe approach.

    We'll be looking to buy a PPOR in the next few years (currently renting and we have investment properties and shares), and when we do we will most likely implement a debt recycling strategy similar to that described.
     
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  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    This is debt recycling. Using income to pay down debt and reborrowing to invest so as to get more income to pay down the debt faster.

    Thousands of people are using this strategy.
     
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  5. Corey Batt

    Corey Batt Well-Known Member

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    Nice and simple strategy - the key is to setup the lending structure correctly so that you can easily expand your available line of credit facility as you reduce the PPOR loan without requiring full applications etc.

    There's very few lenders which allow this type of structure, so get the right advice from an investment focused finance strategist and they will be able to ensure the finance flows correctly with your strategy.
     
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  6. BillV

    BillV Well-Known Member

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    The only thing I would add is that line of credits are usually more expensive products than regular home loans so I would get a separate home loan with a redraw facility
     
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  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    But there can be tax consequences to using a redraw facility. If you can pay directly from the loan it is ok, but problems arise where you have to redraw to a savings account and then transfer the money.

    A lender like AMP allows use of a LOC initially and then this can be converted to an IO loan so you get the flexibility and remove the tax issues and then get the benefits of the lower rate and the term of the IO loan.
     
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  8. BillV

    BillV Well-Known Member

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    Hi Terry
    What if it was a dedicated offset account?
    So let's say I ask for a new loan of $500K and park all the funds into the offset account.
    I then pull funds out of the offset and buy shares as opportunities come along.
    In this instance there is a direct link between the offset account and the $500K loan
    and provided that no other funds are involved it should work?
    What do you think?
     
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  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  10. BillV

    BillV Well-Known Member

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    Thanks Terry, yes I know what you mean.
    It can be mucked up if we decide to do multiple things at the same time.
    But this setup is similar to a LOC and the borrowing costs will be lower.

    With such an arrangement I think it is important to NEVER add more funds to the offset account. The dividends can be paid into our personal savings account account and not to the offset.

    Now on the issue of timing, I think this is a good time to borrow because our equity is high but I believe it is the wrong time to invest in shares (or even property).
    There are people who think any time is a good time but I'm not one of those ;)
    I think that at some point in the not so distant future we would be entering an asset and equity correction phase. I don't know what will trigger it but prices don't seem right to me.
     
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