Debt recycling - Stage 1 - average income

by Peter
(Victoria)

Hi Mike,

I know this has been covered before, however I am hoping you could offer some advice

Age: 36
Home value: 725k
Loan: 320k
Offset amount: 20k
Debt beside home loan: Zero

Income 80k (young family single income).

I want to start debt recycling by accessing 50k and purchasing LICs (Thornill strategy) I plan on adding additional 50k each year until i think im at a level of debt i can manage or the bank is willing to loan. Hopefully 300-350 and more once the home loan is much lower.

Do you think it is ok to start with only 50k and add over to my portfolio slower? Do i earn to little to even make this work?

Besides the average income, we are in a pretty good position, I think and hope to get rid of the loan in

I hope to hear your insight.

Best regards

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May 24, 2020
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by: Mike

Hello Peter,

This is a very difficult one for me to answer without knowing you and your full details. You have done well to have so much equity in your home and no debt away from this.

Using a home loan is better than a margin loan as you are not so reliant on market values. That said, I would remain very cautious and try to repay as much of your home loan as possible. This may not be the optimal financial strategy nine times out of ten, but (as we've seen lately) absolutely anything can happen in the world and the future is completely unpredictable. You should in the very least always prepare for worst case scenarios which means thinking about much higher interest rates (I know difficult to currently imagine), a difficult to impossible refinancing environment, or perhaps worst of all - loss of job.

Therefore, I'd check the terms of your mortgage carefully and make sure you aren't reliant on favorable refinancing. Then, before making investments, make sure you have at least several months of savings (cash) to see you over loss of income. Then, excess cash can be put to work in generating income generating assets. This will then be passive and diversify your income as you move towards retirement. Hopefully you'll also have a very small or no home loan by then as well.

I know this isn't very "exciting" advice but recklessly gambling (by huge leverage) is not what we're here to promote. We want to see people putting excess cash into cash generating assets that provide passive income so we're not as reliant on jobs. You're definitely in a good position with the amount of equity in your house and you can work on building that excess cash through increasing your income and savings.

Mike.

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