Consolidating your debt.

A simple strategy to lower your overall interest rate and more easily manage your debt is to consolidate all debts into one loan that provides a lower interest rate and features to help you repay your inefficient debt faster.

Loan consolidation will save you interest where your new repayment and loan term are at least equal to your total current loan repayments and loan terms. Otherwise, you could be converting your short-term debts into longer-term debt and be paying more interest in the long run.

Be aware

• Early termination fees may apply to your existing loan(s).

• The interest rate on your new loan may be higher than the rate on your existing loan(s).

• Loan consolidation can significantly increase your total interest costs if you make smaller repayments over a longer time.

• Application fees and stamp duty may be applied to your new loan.

Debt Recycling

In some cases, it may be appropriate to consider replacing inefficient debt with more efficient debt that can be used to create wealth tax effectively. This strategy is known as debt recycling but should only be undertaken after a thorough analysis of your financial situation.

Debt recycling can be an effective strategy to accumulate wealth over the long-term. It is a process of using surplus capital or cashflow to reduce inefficient debt and then replacing it with efficient debt in the form of an investment loan. The investment loan proceeds are then invested to form part of your investment portfolio. The inefficient debt is eventually extinguished and an investment loan with fully tax deductible interest remains.

There is no tax benefit available on debt used for personal purposes, but a tax deduction is available on the interest expense on investment loans where the loan is used to purchase income producing assets. Debt recycling therefore results in a more tax-efficient outcome and wealth accumulation benefits through the accumulation of an investment portfolio. Note the investment loan would need to be repaid at some point in time.

To implement this strategy, your tolerance for risk should allow you to feel comfortable with borrowing to invest. There are two ways debt recycling can be undertaken:

Lump sum debt recycling

If you have available capital such as bank account savings, this can be used to repay any inefficient debt such as a home mortgage or personal loan. An investment loan can then be taken for the same amount and be used to invest in an investment portfolio.

Regular debt recycling

If you have regular surplus income, this can be used to increase the regular repayments on your inefficient debt such as your home mortgage or personal loan. An investment loan can then be increased by a corresponding amount and the proceeds used to invest in an investment portfolio.

Article originally appeared at

Any advice given is of a general nature only and does not take into consideration your personal circumstances. Please consider the appropriateness of the advice before acting.

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