My Debt Recycling portfolio

I have recently decided to implement a debt recycling strategy in order to

a)Pay off my PPOR debt faster and

b) Slowly move my PPOR non-deductible debt over to a an investment loan which is tax deductible.


I have managed to get a $70k IO loan at 4.39% (Have ran this through my accountant) and I was looking to buy dividend paying shares with it. I will only get charged interest on the amount I use for investment so am planning to slowly buy shares and start building my portfolio. I have opened a NABtrade account with first 100 trades free for 90 days. Also been researching and reading investment articles and comparing LICs/ ETFs. Here is what I have decided to purchase:

1. AFI or Argo LIC shares. ($15k) – Safe and big LICs paying good dividends. Leaning towards AFI but will look at the NTA and discount/premium on offer before deciding.
2. VAS ($15K) – ETF. Also looking at Betashares A200 but would like to go VAS as they have a proven track record
3. MIR or FGX ($10K) – To diversify to midcap LICs. Cannot decide between the 2.
4. NAB and WBC ($8K each) – Dividend paying shares currently trading at all-time lows.
5. With the remaining $14k I am looking at buying RFF and CWN. Or continue researching to find other options else put more into another LIC like AUI or AFI or Argo.

I am into this for the long term and do not intend to sell any shares. I understand that the portfolio is heavy on dividend paying shares but that is what I am looking for initially.


Do you guys think it’s a good portfolio for what I want to achieve or should I be looking at something else/am I missing something?

 

i will ( only ) comment on the shares i hold directly

WBC has been nice to me but is heavily exposed to the home mortgage market ( my av. is $20.50 a share ) it has avoided most of the fanfare in the Royal Commission but is likely to face some of the coming regulatory headwinds ( bought in 2011 )

VAS ( bought in 2011 , av. SP $57.48 ) this has been nice considering i bought these as an insurance against my beginner selection mistakes . will face the usual market ups and downs but it has to pay 4.4% yield just to break even for you , i would be a little uncomfortable with that risk v. return margin

CWN ( bought Oct. 2017 @ $10.98 ) ... i know young Mr Packer is having some personal issues ( and i don't desire his lifestyle ) but i would rather he was adding his input into this ,
you are putting a lot of trust in the board and this is a niche business ( look at how the rivals are traveling )

RFF ( bought April 2016 av. SP $1.58 ) the risks here are over-expansion , drought , and property values sliding ( and of course your 4.4% interest handicap )

ideally VAS and RFF would be suitable for DRP ( long term growth+ compounding effect )

but that will be conflicted with you interest only loan

how did your accountant explain the tax advantages of this plan ... RFF doesn't pay franking credits , the rest do so far although CWN is only paying 60% ( @ 30% ) franking .

without franking credits i don't think i would like this plan at all

market timing may be very important to you

good luck

 

Thanks for the reply @twisted strategies. Just like you my accountant had advised me to concentrate on shares paying fully franked dividends. Another aspect is the interest paid on the IO loan will also be tax deductible.

 

without the tax benefits the plan didn't have enough upside for my liking


good luck

 

Hope your accountant is licenced to provide this advice. If he is ask him about how capital growth shares could help. You could harvest capital gains and get a 50% tax saving using the 50% CGT discount.

Also the ideal would be not to get an investment loan, but to use a separate split on owner occupied rates so you can save even more interest.

Interest is only deductible if you expect to receive dividends.

 

Yes, it is a separate split on my current loan (3 splits - 1 PPOR loan, 1 Investment Property loan and 1 IO loan). I had the option of P&I or IO rates and I went with IO. My current bank is not very flexible with drawing equity out but I figured if I keep my splits separate, it will be easier to move onto another bank in the future.

I will only be investing in dividend paying shares for now. Thanks for your advise. I have learnt a lot by just reading your posts in this and propertychat forum.

 

How are you settling the shares when you buy them? From memory NABTrade doesn't allow direct settlement from your loan - instead you need to move funds from your loan to your NABTrade cash account and then settle the trades. From memory @Terryw this would risk the nexus between the loan and the use of the borrowing, particularly if the NABTrade cash account had other funds in there rendering the interest on the loan potentially non-deductible?

 

At the very least you would want to make sure the nabtrade account has no cash in it when the borrowed money goes in.

 

I've got no money sitting in the NABtrade account at the moment. I do have some shares in a computershare account which is completely separate from this setup.

On a side note, I am still sitting on my hands and haven't purchased anything yet. Looking at the market volatility it might have been a good thing but if I do decide to jump, it will be for the long run.

For anyone looking at implementing this strategy, this reddit thread has a really helpful chart: As rates begin to rise over the next few years, how are you planning to capitalise on various changes and opportunities? : AusFinance

 

@Decbull how is the debt recycling going? Cheers hinga

 

Decbull

might i suggest watching and learning while you sit ( a new suitable investment might appear while you are watching , or a selected target might start making a series of poor decisions ) don't forget to get very friendly with your calculator when the buying pressure is off .

the market trends up in the long term but part of that rise is inflation ( which is very low at the moment )