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Risks involved in Debt Recycling

Discussion in 'Investing Strategies' started by lancer24, 27th Jan, 2009.

  1. lancer24

    lancer24 Active Member

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    Sydney, NSW
    Hi Guys,

    Could anyone explain to me the risks involved in Debt Recycling ?

    i.e. using a LOC to reborrow against the offset account of a PPOR and using the money to buy MFs/Shares ?

    the one i could think off was unlike margin loans there wouldn't be a chance of getting a margin call on your MFs/shares investments? Am I correct ?

    I had been thinking of buying MFs for the last 6-8 months but have remained on the sidelines and watched the market go into a freefall. My 5% in a savings account looks good right now, but with the interest rates falling those days are nearing their end.

    Am now weighing up the option of buying a property using FHOG and using the LOC to fund investments into stocks. I believe that the property prices in the locality I am looking to buy will increase over the next 4 - 8 years, so it seems to be good option.

    I love the idea of debt recycling, but would like to know the risks involved.

    Cheers,

    Jay
     
  2. qq830821

    qq830821 New Member

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    Hi Jay i guess the most obvious risk would be: putting your house at risk, eg the bank has the discretion to recall the loan in a falling property market. just like what you have seen to the Centro and many other property groups. apart from that, i dont see other disadvantages...

    andy
     
  3. Billv

    Billv Getting there

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    Lancer24

    You'll need to do the sums and see if there will be equity left in your PPOR to be able to have a LOC.
    Banks will let you borrow 80% of the value of the property.
    That means you will have to leave 20% in there, the rest you can put in a LOC.

    But why risk your equity at this point in time?
    I'd do it if it was my play money and wouldn't care if I lost it but I wouldn't put my PPOR at tisk and I certainly wouldn't do it in questionable times such as now.
     
  4. lancer24

    lancer24 Active Member

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    hi qq830821,

    Like i said, i believe that the property prices in the locality i plan to buy will increase in the longrun. they may drop for 1-3 years. But will pickup sooner rather than later. I rent there currently and know the area well. Looking at a 10 year plus horizon, there will be significant gains.

    Also if I am able to service the loan without any issues why would the bank recall the loan. A falling property market then would mean that the loss is mine.

    I don't have much money in savings. Just about 35K. So weighing up the options that I have. Go for a PPOR using FHOG and invest via debt recycling using a LOC. Or continue to rent and invest the savings in MF.
     
  5. lancer24

    lancer24 Active Member

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    Hi Bill,

    This is more of a longterm strategy / outlook.

    Acc to my calculations I can just scrap through and meet all our monthly expenses including those of a standard 30 year mortgage. give or take a 100$. That leaves my entire wifes paycheck intact as surplus income. We can pay this into the offset account and take out a LOC against these extra payments.

    thats with our current salary and I do expect to get raise or move a higher paying job this year. yes, even in these is current economic conditions. :D

    though my wife works for westpac, and they just got rid of a bunch of contractors ! :eek:

    this is still planning statge as to how we can achieve financial freedom and we are trying to work out the pros & cons of the various options.
     
  6. Billv

    Billv Getting there

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    Nice...
    do they still give staff discounts?
    cheers
     
  7. lancer24

    lancer24 Active Member

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    yes they do on all products & services.

    homeloan rates are about 1% lower than standard customer rates , i have been told.
     
  8. davo6253

    davo6253 Well-Known Member

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    The interest rate discounts aren't huge .8-.9 off SVR for most laons or .15-.2 off fixed, however you can get your home loan fee free, which all adds up.
     
  9. Billv

    Billv Getting there

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    Excellent, you can build a nice portfolio like that.
    Does she get a discount on all of her loans or just on the PPOR?
     
  10. davo6253

    davo6253 Well-Known Member

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    As far as I can tell all the benefits apply to all kinds of home loans, including investment. The benefits are also for immediate family, if you are guarantor on loan as well. Quite useful :)
     
  11. powerjen

    powerjen Member

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    From a different perspective entirely, Ive done several comparing calculations with paying down debt on mortgage versus using equity to fund investments (my example was for an investment prop but some companies do it with shares). The thing I find missing from this conversation is : are you really sure that MFs or Shares in fact are going to be a surefire winner against the REAL benefits of paying off your house sooner and not putting your family under any financial strain and risk (say if one of you was to find yourselves out of work). Aust Property Investor magazine (feb 09) just did a comparison on this and found it worked out even after 15 years since they put all spare cash into the loan and paid it off in 7 years, while my calcs come out networth in front with one IP, as I used a smaller income with smaller repayments.

    This past few months I have learned personally that a LARGE amount of equity in a LOC in your home in times of trouble is the best thing you can have. And I do not see the bottom in the sharemarket yet (not that Im a top expert but I do read top experts). Just something to mull over.