Often homeowners ask their financial advisors whether or not they should utilize their surplus funds to pay off their mortgage loan before the tenure. They are usually torn between investing in order to build wealth and pay off their home loan on time. As a matter of fact, although it is vital to diminish your mortgage payments as soon as you can yet at the same time it is also necessary to build wealth so that you can achieve the other things that you dreamt of in your life.
However, there are many who wait for the time when they have totally paid off their mortgage before they even think of investing their dollars. This makes them invest late in life and hence they tend to miss out on the compounding effect. Debt recycling can be a viable strategy for such homeowners.
Debt recycling – What is it and how does it work?
Debt recycling works in a manner where you recycle or redistribute your home loan into another debt where the interest rates are tax-deductible. This strategy helps you to disburse your home loan in a more efficient manner. If you own a private mortgage and you wish to borrow funds for purposes like investment, this option perfectly suits you.
How does it work? You must be aware of the fact that your private home loan is nothing but debt that is non-deductable but when you utilize this debt recycling strategy, you can replace this with a tax-deductible debt which later on becomes you investment. The loan that you take out for investment is interest-only and the payments which would have been done on the loan along with the investment and earnings can all be applied towards the home loan (private one).
Potential benefits of debt recycling
Now that you know how debt recycling works, here are few of the possible benefits of using this strategy.
- You can pay off your home loan faster than what you had planned
- Save on interest rates on your current home loan
- Build income and wealth by making the right investments
- Reduce the taxes by boosting tax deductions every year.
Strategies for debt recycling.There might be various debt recycling strategies but you should always get an idea on the basics. Initially, it starts off with ensuring that you free up all cash flow, including combining your high interest debts into a new loan with reduced rate. Whenever you free up cash, you get enough resources for making an investment.
Just as you need to think of your affordability while purchasing a new home, you also have to think of all your financial resources before devoting them towards the new loan. Keep pulling on the financial resources into the loan until you convert your debts into deductible debt.
So, if you want to sell off your old home and buy a new one, you will require building wealth for securing a loan and making the right down payment. Consider the strategies mentioned above to transform your debt.