Applied Financial Planning

Is debt recycling a smart strategy?

BY   |  WEDNESDAY, 27 MAR 2024    8:00AM

Investors seeking to use the equity in their homes to grow their wealth are faced with numerous considerations and should approach such a strategy with care and caution.

Two friends of mine are halfway through a rebuild of their home. They knocked the house down, moved into a rental unit and are awaiting the completion of their new home.

They planned this project for many years, and a lot of time and effort were needed to reach this stage. However, it seems they are now seriously contemplating selling the new house, paying off their mortgage and buying another property with requires less debt.

The fact that debt is involved in this project comes as no surprise given the cost of purchasing a home in Sydney-knocking that house down and rebuilding another amplifies the debt burden.

New homebuyers find themselves forced to take on ever-increasing levels of debt to afford a home. This is of course a voluntary decision-no one is forced to purchase a home, and I, for instance, have chosen to rent. However, many do not believe that renting is a choice given societal expectations and the desire to have a stable place to raise a family.

What is unequivocally a voluntary decision however is to take on additional debt to pursue a strategy to improve one's financial situation. I am often asked-is there merit in debt recycling?

Debt recycling considerations

There are four considerations for those planning a debt recycling strategy:

1.           Can debt be 'good'?

2.           Should you care about net worth?

3.           What return makes debt recycling worthwhile?

4.           Are you giving up the main advantage of your primary residence?