We often hear about debt recycling and it is often promised as a good way to eliminate debt. The basic concept of debt recycling is to reduce any non tax-deductible interest in our debt and replace that with any of our tax deductible interest on other debt. The real purpose of this method is to increase the overall tax efficiency and we will be able to repay our debt with non tax deductible much faster. In some countries, mortgage or home loan is considered deductible, such as in the United States, Switzerland, Sweden and the Netherlands. However, it is not recommended to choose this strategy if we don’t have written financial advices.
Debt recycling should be considered as a strategy to effectively help people pay off their essential debts, such as mortgage and other large loans, especially those with non tax deductible interest. By doing this faster, we will be able to have better investment portfolio. Normally, we do this by taking separate investment loans against our home’s equity. An effective debt recycling method should allow us to increase our overall wealth and we will be able to properly invest our money. We could do this while paying off our mortgage or home loan faster. There are different steps associated with debt recycling.
It may be necessary to take out investment loans against our home equity that is separate from our home mortgage. This can be performed for consumption purposes. In general, we should only borrow up to 50 percent of our home equity and no more than 80 percent if we need more money. When borrowing against our home equity, we should make sure that we are able to repay the money back. Without proper plan, it is quite possible that we will lose something much bigger. One of the best methods is to obtain a loan against our home equity that is used to produce income.
In general, we should have rather aggressive financial planning method. It should work us and match our risk profile. There are real risks that we may need to consider. This is important because, with improper strategy, we could end losing our home. It means that our investment portfolio should be designed by a certified financial planner. It is important to make sure that we won’t end up losing money during any kind of economic cycle. The terms and basic conditions of our loans should allow us repay our loans in proper ways. This is essential if we want to safeguard our assets.
It is important to know that the valuation of our home could actually fluctuate and it doesn’t always go up. Property bubble that bursts could cause overall reduction of property values. Taxation issues could also cause many more problems, especially we need to pay so much during the transaction. It means that our current valuation of our house should be valid. This is essential if we want to make the most of our home equity loans.