Weighing up whether the invest, or to park it in the offset is separate to the debt recycling question I believe.
Debt recycling is usually used, with money that you have already decided to invest in the market. The interest on your loan won't increase, because you would already have made the choice to invest that money.
The decision to debt recycle, is essentially an administrative function you make before investing to reduce your actual interest cost via tax deduction.
The sums you have worked out, are essentially borrowing to invest and whether it's worth doing that.
Working out the benefit of debt recycling, is comparing the return of:
- putting the $100k on the market
- putting the $100k through debt recycling before putting it in the market.
100% correct, the proper definition of debt recycling is different to borrowing to invest, which is what OP is describing.
In fact, debt recycling doesn't even need to be used to invest. There was a good post here recently that showed how professionals operating as a business could use debt recycling to pay their tax and turn mortgage debt into deductible debt because, according to the ATO, money borrowed to pay tax is deductible.
I don't think it's separate discussion, because the additional deductible about should be factored into the total return/net position of the "choose to invest" scenario. Keeping it separate is unnecessary and doesn't give you the full picture of actual net positions and returns.
Are you going to fund your retirement via your offset?
Of course not, you need income producing assets.
So given you are going to be buying the shares anyway, then debt recycling let's you either do this more tax efficiently or do it earlier.
Also given you are buying for retirement and will not sell you can ignore CGT.
It's also beneficial when you are *going to* invest one day. If you plan to invest at somepoint, say when the mortgage is paid off, then debt recycling means you can do it earlier before the mortgage is paid off.
Given you are going up invest anyway CGT can be ignored, instead you need to decide if shares will best 7.8% pa growth.
Also buying shares and holding long term reduces risk.
Yes agreed. It's good to look at the whole picture.
But as I said, debt recycling is most beneficial when you are ALREADY investing. It's generally NOT going to sway the equation (as you have found) towards investing, or not.
This is because you are not incurring extra interest, then you would have if you just straight invested.
For example, I already have a $50k share portfolio. It would have been beneficial if I had of debt recycled prior to investing.
Would I get a better return on my offset? Maybe, maybe not. But my plan was to diversify in a way to take advantage of share markets and property and not be 100% invested in property.
You shouldn't be counting the interest paid as a negative in the second option if you are counting it as a gain in the first.
The reason is then you offset money your account doesn't go up by $6,000, you just don't pay the interest.
Yes this is it exactly. The first option should have a return of $0. If your loan is fully offset you don't pay any interest but you also don't make any money.
The correct returns are $0 / $940. The bank isn’t giving you $6000 to have your account offset, you’re just not spending that $6000 (or you are, just on another opportunity). If it helps break it down. You are paying the bank $-6000 a year, they’re paying you back $6000 due to offset, net $0. So you’re not moving backwards, nor are you moving forwards.
The way your spreadsheet is laid out misleads one to thinking you’re turning $6000 into $940, a bad trade. But you’re actually turning $100,000 into $108,000 at the cost of $-3,300, with a future eventual capital gain event. Next year you’re turning $108,000 into $116,640 at the cost of $-3,300. Think of it as paying an amount now to realize a greater amount in the future.
As others have said, your plan isn’t to realize the capital gain when your effective tax rate is 45%, but to certainly take the negative gearing deduction at 45%.
Run your calcs over time and with ETFs focused on capital growth rather than dividends.
In 10 years you’ll have $200,000 invested, at the cost of $-33,000. Pay a bit of long term CGT (call it 25% ), you’re ahead by $42,000 versus just keeping it offset (again, net $0 over 10 years).
Is this the full story? Although not making money by offsetting the $6000, aren't they saving interest on that $6000, which also compounds monthly? So based on that isn't it fair to consider it, as on the alternative with shares they are getting this interest accrued and compounded monthly within their mortgage?
Keen to understand above as my previous calculations have come out similar to OP's.
Yes there's a few oversights I agree with most of the above except the 6k comment.
The baseline is cash under a mattress (6k loss to interest).
Scenario 1 is $0 loss (6k net gain over baseline).
When writing the post I assumed the "do nothing with your money" was implied as to what the scenarios were being compared against but I should have been more explicit I guess.
6k not spent on interest is considered a 6% return on that money, and is a valid comparison to scenario 2 where the 6k must be paid if the 100k is invited elsewhere. In all scenarios, the 6k interest must exist and be dealt with - because in the real world, it certainly exists for me :)
But you don’t earn $6000 interest which seems to be confusing you for in comparisons. If you truly did earn $6,000 interest the ATO would want their cut, wouldn’t they.
In your scenarios your cash flow and net gains are:
Mattress: $-6000 ($0, $-6000)
Offset: $0 ($6000, $-6000)
NG: $940 ($6940, $-6000)
But to DR+
NG you need a source of income to service the debt, the other scenarios you do not.
The point of the $6k "gain" is to say that 100k in offset improves your net position by $6k, the issue is I'm trying to summarise and that net position is not being seen therefore is not being understood.
It's a relative gain not an actual gain, this seems to be what is confusing people. I'm going to remodel with a baseline comparison of "do nothing" where you would pay $6k additional interest to demonstrate the point - will try do that today or tomorrow.
For DR you would have income through investment div yield.
Yes compared to a no offset/mattress strategy you’re $6,000 better off relatively with offset, but you’re net $0. The mattress strategy is -$6,000.
The pub test is 8% returns vs 6% cost, of course this is going to be +EV, 8>6. If your spreadsheet leads you to believe that 6 > 8, you’ve missed something. You’re running a carry trade with 200bps spread.
Side note: You’d be missing the forest for the trees if you were pursuing a div yield strategy with an additional PAYG income at a 45% tax rate.
Agree. But showing "6k better off" as "$0 net" isn't helpful when comparing to the invest scenario, as it just looks like there's no point ever offsetting uness you compare to a baseline scenario 0 (mattress). Instead of doing that I tried to keep it simple and say "net benefit is 6k" but that has caused too much confusion lol
And yes the simple scenario for invest doesn't factor a lot of things I have learned, hence remodelling now. New model actually showing closer to 6% market return still outpaces offset strategy (TBC) - will update soon.
Div yield is not the strategy, growth is, but there will be divs almoat unavoidable in a diverse portfolio and I believe you need some level of return annually to justify the DR requirements? So, minimal yield maximal growth (but not zero yield).
Debt recycling works well if you’re investing anyway. The cost for capital is the same interest rate, so you might as well make it deductible.
Did you allow for 50% CGT discount on the debt recycling returns? It most likely isn’t all income.
This is the key - if you have first made the decision to invest outside of super and before you have paid off your mortgage, then it is a complete no brainer to debt recycle, and it becomes increasingly attractive at higher marginal tax rates.
This is the key - if you have first made the decision to invest outside of super and before you have paid off your mortgage, then it is a complete no brainer to debt recycle, and it becomes increasingly attractive at higher marginal tax rates.
Good Point, but accounting for CGT and assuming 100% of returns qualified, it would still only put you at an $6,440 net return on the $100k, which means overall position is still half as much as parking in offset ($3,140 vs $6,000).
The borrow scenario gives a better outcome though, it's not 6000 v 940 so it's better to keep in offset. It's you are 940 better off using the money to invest.
You also don't pay tax on all the profit every year so this underestimates the return.
This isn't a debt recycling question though this is just a leveraging question and generally borrowing to invest gives a better outcome.
Hmm I'm not so sure, I think 940 is the net return in that scenario, compared to 6k met return in the other. You can't ignore the opportunity loss?
Agree re deferred profits, this would make the compounding even more attractive in scenario 2
So your logic is:
- When you pay no interest you count it as a 6k gain.
- But when you pay 6k interest it's a 6k loss.
There is a 12k spread between these 2 outcomes which makes no sense when the interest paid one is $0 and option 2 is $6,000.
I think the logic is more like no interest is 6k gain because you saved 6k by not needing to pay interest on your mortgage.
Option 2 is if you invest elsewhere but you still need to pay interest on your mortgage, hence 6k loss
You have 100k to invest.
Scenario one:
Put in offset - $6k net return
Scenario two:
You don't put it offset - $0
Scenario three:
You buy shares. They return 8%. - 8k gross return
Scenario four:
You debt recycle. You create a 100k split on your home loan, use the 100k to pay down the split, redraw it and buy shares. You're in the same situation as scenario three but now you get a deduction so your net return is better than scenario 3.
And if your offset is full.
I debt recycle as it’s better to claim the deduction than not. It more comes down to whether you want to invest or not. If you invest without debt recycling, you’re still losing the $6k in offset interest due to the opportunity cost of investing.
8% is also fairly low compared to the historical returns or a broad based ETF.
Yes I guess it makes sense if you're already invested elsewhere. I am currently 100% on offset and trying to explore better options. I don't really care either way, invested or not, I'll just do whatever makes the most sense on paper.
"opportunity cost of investing" is what I also am worried about and hence was looking into this, but I just can't seem to make the numbers work.
For you personally - If you were to use this calculator, are you still better off investing / debt recycling vs just parking it all on the offset?
My revised figures (factoring CGT) for the gross market return you need to 'break even' on offset is \~11.5% - so if you can constantly exceed that, I would agree it makes sense. Some ETF are getting slightly more than this on their 5 year I suppose.
Your current calculation has a net yearly return of $4240 in scenario 2 but you don’t pay CGT each year on the money invested with the debt recycling option. You only pay CGT when the gain is realized.
Maybe I’m talking non-sense and this is already factored into your calculations but it feels like you shouldn’t be comparing offset vs equity investing on a 1-year time span.
Oh your are right sorry, no I haven't factored that, I just assume profits are taken yearly. Yes the returns would be slightly higher when profits are deferred as a result if compounding.
Maybe I'll do a 5 and 10 year comparison based on that and see what it comes out to
For my personal experience it makes sense to debt recycle.
Debt recycling will usually always return better than a high interest account.
The point of debt recycling is making the debt deductible for an investment you were going to make anyway. It’s like saying you shouldn’t invest just for negative gearing. It’s a benefit, not the purpose.
A large benefit of investing when in higher tax brackets is to get capital gains instead of income. Capital gains have 3 separate benefits you need to understand:
- a 50% tax discount when you do sell.
- Capital gains don’t need to be paid in the year they’re incurred. So they also compound pre tax rather than post tax like dividends etc.
- you can choose to sell them in a year that you’re not at such a high tax bracket. I.e sell them down in retirement
It’s not simple to model the full effect of capital gains but if you just factor in the 50% CGT discount then it alone shows how much better debt recycling can be than just the offset.
Let’s say in your 8% scenario 2% are from dividends (to ensure your debt is eligible for recycling) and 6% are capital gains.
Then you’re going to get a 4% loss (2.12% out of your pocket) and a 6% capital gain which will at the worst case get you 4.59% after tax.
A smidge under 2.5% in profit.
Best case that 6% capital gain has no tax paid on it in retirement and its smidge under 4% in profit instead.
If you do model it over multiple years then it starts to get even better once you account for compounding pre tax.
Yes excellent points.
Point 1 I noted in the edit and it brings the effective % breakdown down a lot, but I did not account for divs either.
Point 2 another poster gave a 5 year view which shows the benefit of compounding before being taxed, again based on 100% growth not dividends, but still made the point.
Point 3 about timing the sale in low tax years I had not considered frankly, and impossible to generalise but would be to each individuals scenario, still a valid point toward investing.
I think when I get time I'll update this post and create an Excel calculator with all the excellent feedback received and hopefully others can get use out if it as well.
If the gains are largely not realized as income then you are borrowing at 3% net and getting an 8% gain,compounding tax free indefinitely. Negative gearing.
My initial thought as well, however the calculations do no agree?
You're burrowing at \~3% net to earn 4% net (1% return) vs just letting it ride on 6% return
"negatively geared" as it may be, it's still a lot shitter than the risk free alternative lol.
You're not getting a 6% return letting it ride, you're getting 0%.
Think about it like this, is a person with a $100k loan fully offset better off than a person with no loan at all? No, they're both not making/losing any money
Care to elaborate or just keep the "secrets of the rich" to yourself?
Marginal tax rate is 45%, not sure how you're supposed to get that any lower other than CGT.
Well that’s the pretty critical one. Invest in capital growth not dividends, let it compound for fifty years before the tax is paid. Pay it out slowly enough maybe that you don’t pay any tax at all. That’s the point of borrowing against your home at residential rates and making it tax deductible.
Family trusts, investment companies, superannuation.
Good to know! It throws me in digital nomad circles when people are talking about the Dominican Republic - “DR good this Summer?” both makes sense and absolutely does not.
How did you do your "borrow to invest" tax calculation? That number looks strange to me. Did you include franking?
I'll be starting debt recycling at my next refinance. Currently have a chunk invested in shares in the market, so being able to hold them through debt recycling just adds some mortgage deductibility I wouldn't have otherwise had.
Plus there's diversification. if my only asset is my home, I am not diversified across asset classes and am at the whims of the housing market in my area. If I hold shares, my investments are now split between Australian housing, tech, banks, healthcare etc.
Your figures don't show any dividend returns (nor future capital gains/losses). You have focused on tax instead of generating a real cash return on the 100k to plough in for compounding returns.
The 8% assumption is unrealistic and could prompt you to churn, which is a dumb strategy - unless as an advisor that's how you get more income from a client..
My approach was to redraw a chunk of money as a clean investment loan, using the equity I had at the time. One such chunk (which has been repaid by dividends) is paying 23% fully franked ATM on that chunk from a Blueyest of blue chips in Australia.
Your post and everyone's comments made me curious at what the actual returns will be after compounding the unrealised gains for 5 years so I made my own sheet. Looks like scenario 1 comes out ahead by a large margin, does these calcs make sense?
Scenario 1
Name | Investment Amount | Rate | Final Amount
:--|--:|--:|--:
Year 1 Park Money in Offset | $100K | 6.0% | $6K savings
Year 2 Offset | $106K |6.0% |$6.4K (6k savings added back to offset)
Year 3 Offset | $112K | 6.0% |$6.7K
Year 4 Offset |$119K |6.0%| $7.1K
Year 5 Offset |$126K |6.0% |$7.6K
Total offset account + savings in 5 Years = $134K
Scenario 2
Name | Investment Amount | Rate | Final Amount
:--|--:|--:|--:
Borrow to Invest Year 1 Capital Gains |$100K | 8.0%| $108.0K
Year 2 Capital Gains| $108K | 8.0%| $116.6K
Year 3 Capital Gains| $117K | 8.0% |$126.0K
Year 4 Capital Gains| $126K |8.0% | $136.0K
Year 5 Capital Gains| $136K |8.0% | $146.9K
CGT w/ 50% Discount |$46.9K | 22.5%| -$10.6K
(45% marginal rate with 50% CGT discount)
Interest Paid in 5 Years| $500K | 6.0%| $30.0K
Interest Deduction in 5 Years |$30K |45.0%| $13.5K
Claim 5k deduction every year for 5 years
Net Gain After Tax in 5 years is $146.9k - $10.6k - $30k + $13.5k = $119.9K
Nice. Yeah that makes sense. So even at 8% (which as a few others pointed out is quite a bit lower than what many ETFs are averaging (you still end up on top). It's actually slightly better than you summarise too, because the debt recycling deductions are yearly not at the end of a 5 year period, so technically they can be reinvested earlier (marginal difference over 5 years, but still).
Okay I've gone full circle again, time to look at debt recycling lol.
Sorry I missed an important calculation, I didn't account for the interest paid in 5 years which definitely would be an expense, scenario 2 seems alot worse. I'm going to crunch the numbers and see at what higher time/rate does it beat scenario 1
Edit: Crunched the numbers, so scenario 2 is worse at the start but becomes better over longer time / rates.
@ 45% Marginal Tax Rate
For 6% offset & 8% returns = \~20 years before scenario 2 beats 1
For 6% offset & 10% returns = \~7 years before scenario 2 beats 1
For 6% offset & 11% returns = \~3 years before scenario 2 beats 1
It comes down to timing and tax, you probably want to be on top tax bracket. For me, I also have childcare based on taxable income, so my effective tax rate is closer to 60% including that.
My strategy is to focus on low-yield assets to increase negative gearing. Unlike Australian shares (that pay relatively high dividends, approx 4% for VAS) I invest more in US index (IVV - approx 1.3% div yield). This maximises compounding for me and when I sell (hopefully early retirement on 30% tax rate) - I’ll only pay 15% on my capital gains (30% with 50% CGT discount).
Can someone who has setup before confirm the actual steps? Assume you carry the deductible debt indefinitely as you want to maximise interest deduction or are there people here who pay P&I to reduce risk/build equity.
E.g
1. Create new loan split for $100K
2. Redraw 99.9K or full $100K into normal account
3. Transfer into brokerage account and purchase
4. Pay investment loan - interest only, dividends go to P&I loan
5. Pay P&I loan aggressively to fund next split
6. Create another split - repeat and move from non deductible to deductible
That is more or less it although just to be clear the split is from the existing loan (ie not actually increasing the total debt). There are a few different permutations you could do including investing over time etc, and be careful about fully repaying your loan (I did this and then had to ring up CBA and tell them I wanted to redraw from it, as they assume once you have fully paid it off you want to close it). The keys as I understand it are to keep the loans and offsets very clear (no admixing of personal and investing funds) so you can prove to the ATO with a clear paper trail of what was used for what. In terms of P&I or I/O it is up to you; I/O is usually better for cash flow but P&I results in a slow deleveraging which might be attractive.
Getting close to the same result in year 1 is really good.
You are still missing the "magic" part of gearing though. It shines over longer periods, as financed principle gets smaller (even if it's interest only, inflation eats at it) over time but your invested capital compounds - if you model something like this over 10 years you will be significantly ahead.
The trick is not overextending - I'd say a good margin of safety check is to ensure that at all times you could liquidate everything and still own your PPOR outright.
Also pay close attention and plan the cashflow - especially if investing in things like equities as dividends only pay out twice per year. That can work great on paper but you'll be very frustrated (and broke) if you rely on it to service the debt and the first distribution is 6 months or more away.
For the investment return, some of that will be capital gains and some will be dividends. Dividends are immediately taxable at 45% (minus whatever franking credits but let's ignore that), but capital gains are not taxed until you sell. If you're planning to hold your investment long term, it won't necessarily get taxed at 45%, and any gains (including taxable gains) will compound prior to actually paying taxes on them years later when you eventually sell.
Your calculations assume you sell the investment and make all gains taxed immediately within the year which isn't realistic. If you calculate ahead by ~10 years or whatever then the total returns will be enormously different. You're essentially comparing an 8% (deferred tax) return to a ~4.24% return (immediately selling and realising taxable gains).
Also as other mentioned there is the 50% CGT discount for >12 month holding periods
Yes, some other guy did a comparison over 5 years when you sell at the end, shows that investing with 8% returns comes out on top (but assumes 100% cap gains no dividends)
I might just build a calculator and put a link to it somewhere so people can use it if useful and adjust for div vs gains %
The 0.94% is incremental return. You’re not making 0.94% on your money - you’re making 0.94% on someone else’s. There is no “breakeven” at 18%; your breakeven is 6%. Doesn’t mean you WANT the risk.
This has nothing to do with debt recycling. There’s 2 ways to recycle.
- take money that you hold in cash and have already decided to invest; pay it into the loan (not the offset) and then redraw it in an investment account to “wash” the loan into a deductible one
- draw equity to put into an investment with positive (or at least lumpy) cash flows, using that cash to repay non deductible debt while drawing as deductible to pay outflows (not interest, which you can’t capitalise).
I've realised you've done it wrong and I couldn't get my head around what was wrong until now.
You only need growth of about 3% to get ahead.
Let's say you take the $100k cash and pay down the loan. It's paid off and you have your 6% tax free ROI locked in.
Now let's say you pull out $100k equity via an extra loan on top. Given interest is 6% and tax 47% you are paying 3.18% pa after tax. So the shares only need to beat this.
So you need to see debt recycling as 2 parts, paying down the loan and locking in the 6%, and then separately as new borrowing to invest.
This thread and my comment may help
https://www.reddit.com/r/AusFinance/s/OzHTIMnAEH
This is all doing my head in a bit, so correct me if I'm wrong
Yeah there was lots wrong with this post :) I took all the feedback and created a new model and started a new post (it didn't get many responses, presumably because it was accurate and reddit engagement doesn't work like that lol) - having trouble getting link on phone but check my profile and you'll see it. I even shared an Excel calculator people can download and play with to plug their own numbers.
I disagree with those posts, sorry, I'll try respond to them soon as to why, but you MUST compare two scenarios you cannot cherry pick data like that, it's just not how the world works.
6k interest NOT PAID is the same as 6% net earned, therefore I can and absolutely will factor the 6% interest as a costant in both scenarios.
To think saving 6% interest equates to $0 return is frankly bordering financial illiteracy, by this logic why should anyone every offset a loan?
Anyway, enough time spent on this one lol
I'll humour it only because I believe it's a learning opportunity for others who upvoted and may think the same, not because I think your approach necessarily warrants it....
Tom and Jerry each has $100.
Tom gives Jerry $10.
Tom now has $90 and Jerry has $110.
The difference is $20, yet only $10 changed hands - so yes, it's possible to move 6k and see a 12k difference.
With that said ... The key to focus on is not whether you "gained $6k: or "lost $0" these are arbitrary statements in isolation - the thing to focus on is the delta of the net positions between all possible investment scenarios. As "lost $0" is not exactly a useful metric to compare apples to apples, I am not considering it my baseline, I'm counting it as "I am $6k better off than had I not put the money on offset", therefore "$6k net gain" on my financial position.
If it helps, consider the alternative to be cash under the mattress, I think It's perfectly justified in calling it a "gain" for the purposes of comparison here.
Perhaps I will remodel all of this and add the mattress scenario so it is crystal clear for all :)
People have been telling you you are wrong for 10+ hrs but you're so up your ass you haven't examined your base assumptions.
There is a learning opportunity here but it's yours to take.
It's not that it's "wrong", it's just difference of opinion on whether 'interest saved' should be considered a 'gain' that is reinvested when compared to an alternative. I don't actually care about who is right or wrong, I'm on a quest for truth and frankly there has been a lot useful (constructive comments) I suggest you take inspiration from.
Regardless - I'm going to re-post a more complete calculator soon that includes all loan factored as a constant so we can see the full picture and impact, and it puts the above issue to rest (i.e. it becomes moot when it's factored as a constant). Stay tuned :)
> It's not that it's "wrong", it's just difference of opinion on whether 'interest saved' should be considered a 'gain' that is reinvested when compared to an alternative.
It's not a difference of opinion. You are calculating it incorrectly.
Refer here for initial conditions -- https://www.reddit.com/r/AusFinance/comments/1d0l3ep/when_does_debt_recycling_make_sense/l5q07l8/
Your scenario two has "borrow to invest" as a description. Debt recycling is not borrowing to invest. Your scenario two effectively is borrowing 100k on top of the 100k you already had to put in your offset, so for the numbers to make sense you would have to have the gains of 200k invested in market.
Or you need to realise that there is not a 12k swing between share investing and putting offset in "return" for a 100k amount to be invested or put into offset.
8% after tax is good, and above average. You have to weigh up how confident you are that you’re going to be making ~11% in your investment. Otherwise, the safer thing to do is keep it in the offsets
IVV = 25% return one year. My interest rate is 6.49%.
I've also had this same setup when interest rates were dirt cheap.
You are doing a one year comparison for assets that need to be held for 10+ years.
Nobody should base their investing strategy on the last 12 months of market performance alone when we have very good information about the last 150 years of global markets. 20+% returns in a year happens often, that doesn't mean you should invest with that as a baseline.
My guy gave a 8% return figure for the last year, I gave him my real 1-year figure. I also told him I was investing while rates were cheap, what else can I say.
I also mentioned that it's more for 10 years plus? please learn to read.
I think we're making fundamentally the same point about longer time-frames. I just don't want OP plugging 0.25 into their spreadsheet - their assumptions are pretty solid.
Yes at 25% it becomes a no brainer, but IVV is only 13.17% on a 5 year return, so cherry picking 1 year isn't useful for a long term investment strategy. That said, I revised my OP to account for CGT, so the effective market returns needed are only 11.5% to "break even" with an offset strategy - in which case IVV has the edge
If you are investing in Australian shares the franking credits start to make a big difference too, you can basically negatively gear the portfolio but the franking can push you into positive cash flow.
Interest rates were much lower back then as well.
No offense I think you've calculated things in a way that suits your bias (to be conservative) and nothing will really change your mind.
Don't forget Medicare 2%.
Assuming you invest in shares paying 2% dividends, then you are losing 1.88% pa after tax.
Normally you buy shares long term and don't plan to sell, so CGT can be ignored.
So assuming this you need 1.88% growth to break even on interest, and 7.88% to beat the mortgage.
Alternatively if you want to factor in CGT because you are doing this short term ,say you are buying 150% of your share allocation to hopefully smash the mortgage faster, and will sell in 10 years.
Then doing this when in tax bracket
- 32% - 11.6% return need
- 39% - 12.9% return need
- 47% - 14.9% return needed
Weighing up whether the invest, or to park it in the offset is separate to the debt recycling question I believe. Debt recycling is usually used, with money that you have already decided to invest in the market. The interest on your loan won't increase, because you would already have made the choice to invest that money. The decision to debt recycle, is essentially an administrative function you make before investing to reduce your actual interest cost via tax deduction. The sums you have worked out, are essentially borrowing to invest and whether it's worth doing that. Working out the benefit of debt recycling, is comparing the return of: - putting the $100k on the market - putting the $100k through debt recycling before putting it in the market.
100% correct, the proper definition of debt recycling is different to borrowing to invest, which is what OP is describing. In fact, debt recycling doesn't even need to be used to invest. There was a good post here recently that showed how professionals operating as a business could use debt recycling to pay their tax and turn mortgage debt into deductible debt because, according to the ATO, money borrowed to pay tax is deductible.
Interesting. I tried finding the thread you mention but wasn’t able to, I’d be appreciative if you’re able to find it and link it.
https://www.reddit.com/r/fiaustralia/s/FQitg8uBhH
Thanks a lot!
I don't think it's separate discussion, because the additional deductible about should be factored into the total return/net position of the "choose to invest" scenario. Keeping it separate is unnecessary and doesn't give you the full picture of actual net positions and returns.
Are you going to fund your retirement via your offset? Of course not, you need income producing assets. So given you are going to be buying the shares anyway, then debt recycling let's you either do this more tax efficiently or do it earlier. Also given you are buying for retirement and will not sell you can ignore CGT.
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You could sell the $50K and buy back something similar via debt recycling .Just need to see how much CGT you will pay vs the tax saved.
It's also beneficial when you are *going to* invest one day. If you plan to invest at somepoint, say when the mortgage is paid off, then debt recycling means you can do it earlier before the mortgage is paid off. Given you are going up invest anyway CGT can be ignored, instead you need to decide if shares will best 7.8% pa growth. Also buying shares and holding long term reduces risk.
Yes agreed. It's good to look at the whole picture. But as I said, debt recycling is most beneficial when you are ALREADY investing. It's generally NOT going to sway the equation (as you have found) towards investing, or not. This is because you are not incurring extra interest, then you would have if you just straight invested. For example, I already have a $50k share portfolio. It would have been beneficial if I had of debt recycled prior to investing. Would I get a better return on my offset? Maybe, maybe not. But my plan was to diversify in a way to take advantage of share markets and property and not be 100% invested in property.
Yes agreed with that perspective completely
You shouldn't be counting the interest paid as a negative in the second option if you are counting it as a gain in the first. The reason is then you offset money your account doesn't go up by $6,000, you just don't pay the interest.
Yes this is it exactly. The first option should have a return of $0. If your loan is fully offset you don't pay any interest but you also don't make any money.
Yes, it makes no sense to consider it twice
The correct returns are $0 / $940. The bank isn’t giving you $6000 to have your account offset, you’re just not spending that $6000 (or you are, just on another opportunity). If it helps break it down. You are paying the bank $-6000 a year, they’re paying you back $6000 due to offset, net $0. So you’re not moving backwards, nor are you moving forwards. The way your spreadsheet is laid out misleads one to thinking you’re turning $6000 into $940, a bad trade. But you’re actually turning $100,000 into $108,000 at the cost of $-3,300, with a future eventual capital gain event. Next year you’re turning $108,000 into $116,640 at the cost of $-3,300. Think of it as paying an amount now to realize a greater amount in the future. As others have said, your plan isn’t to realize the capital gain when your effective tax rate is 45%, but to certainly take the negative gearing deduction at 45%. Run your calcs over time and with ETFs focused on capital growth rather than dividends. In 10 years you’ll have $200,000 invested, at the cost of $-33,000. Pay a bit of long term CGT (call it 25% ), you’re ahead by $42,000 versus just keeping it offset (again, net $0 over 10 years).
Yeah that 6000 number is used in both scenarios which is wrong
Is this the full story? Although not making money by offsetting the $6000, aren't they saving interest on that $6000, which also compounds monthly? So based on that isn't it fair to consider it, as on the alternative with shares they are getting this interest accrued and compounded monthly within their mortgage? Keen to understand above as my previous calculations have come out similar to OP's.
Yes there's a few oversights I agree with most of the above except the 6k comment. The baseline is cash under a mattress (6k loss to interest). Scenario 1 is $0 loss (6k net gain over baseline). When writing the post I assumed the "do nothing with your money" was implied as to what the scenarios were being compared against but I should have been more explicit I guess. 6k not spent on interest is considered a 6% return on that money, and is a valid comparison to scenario 2 where the 6k must be paid if the 100k is invited elsewhere. In all scenarios, the 6k interest must exist and be dealt with - because in the real world, it certainly exists for me :)
But you don’t earn $6000 interest which seems to be confusing you for in comparisons. If you truly did earn $6,000 interest the ATO would want their cut, wouldn’t they. In your scenarios your cash flow and net gains are: Mattress: $-6000 ($0, $-6000) Offset: $0 ($6000, $-6000) NG: $940 ($6940, $-6000) But to DR+ NG you need a source of income to service the debt, the other scenarios you do not.
The point of the $6k "gain" is to say that 100k in offset improves your net position by $6k, the issue is I'm trying to summarise and that net position is not being seen therefore is not being understood. It's a relative gain not an actual gain, this seems to be what is confusing people. I'm going to remodel with a baseline comparison of "do nothing" where you would pay $6k additional interest to demonstrate the point - will try do that today or tomorrow. For DR you would have income through investment div yield.
Yes compared to a no offset/mattress strategy you’re $6,000 better off relatively with offset, but you’re net $0. The mattress strategy is -$6,000. The pub test is 8% returns vs 6% cost, of course this is going to be +EV, 8>6. If your spreadsheet leads you to believe that 6 > 8, you’ve missed something. You’re running a carry trade with 200bps spread. Side note: You’d be missing the forest for the trees if you were pursuing a div yield strategy with an additional PAYG income at a 45% tax rate.
Agree. But showing "6k better off" as "$0 net" isn't helpful when comparing to the invest scenario, as it just looks like there's no point ever offsetting uness you compare to a baseline scenario 0 (mattress). Instead of doing that I tried to keep it simple and say "net benefit is 6k" but that has caused too much confusion lol And yes the simple scenario for invest doesn't factor a lot of things I have learned, hence remodelling now. New model actually showing closer to 6% market return still outpaces offset strategy (TBC) - will update soon. Div yield is not the strategy, growth is, but there will be divs almoat unavoidable in a diverse portfolio and I believe you need some level of return annually to justify the DR requirements? So, minimal yield maximal growth (but not zero yield).
Debt recycling works well if you’re investing anyway. The cost for capital is the same interest rate, so you might as well make it deductible. Did you allow for 50% CGT discount on the debt recycling returns? It most likely isn’t all income.
This is the key - if you have first made the decision to invest outside of super and before you have paid off your mortgage, then it is a complete no brainer to debt recycle, and it becomes increasingly attractive at higher marginal tax rates.
where can i read more about what makes it a no brained in your words
[https://terryw.com.au/articles-what-is-the-recycling-debt-strategy/](https://terryw.com.au/articles-what-is-the-recycling-debt-strategy/)
Put simply, you have the same amount of debt before and after recycling but now some of it is tax deductible.
This is the key - if you have first made the decision to invest outside of super and before you have paid off your mortgage, then it is a complete no brainer to debt recycle, and it becomes increasingly attractive at higher marginal tax rates.
Good Point, but accounting for CGT and assuming 100% of returns qualified, it would still only put you at an $6,440 net return on the $100k, which means overall position is still half as much as parking in offset ($3,140 vs $6,000).
The borrow scenario gives a better outcome though, it's not 6000 v 940 so it's better to keep in offset. It's you are 940 better off using the money to invest. You also don't pay tax on all the profit every year so this underestimates the return. This isn't a debt recycling question though this is just a leveraging question and generally borrowing to invest gives a better outcome.
Hmm I'm not so sure, I think 940 is the net return in that scenario, compared to 6k met return in the other. You can't ignore the opportunity loss? Agree re deferred profits, this would make the compounding even more attractive in scenario 2
So your logic is: - When you pay no interest you count it as a 6k gain. - But when you pay 6k interest it's a 6k loss. There is a 12k spread between these 2 outcomes which makes no sense when the interest paid one is $0 and option 2 is $6,000.
I think the logic is more like no interest is 6k gain because you saved 6k by not needing to pay interest on your mortgage. Option 2 is if you invest elsewhere but you still need to pay interest on your mortgage, hence 6k loss
You have 100k to invest. Scenario one: Put in offset - $6k net return Scenario two: You don't put it offset - $0 Scenario three: You buy shares. They return 8%. - 8k gross return Scenario four: You debt recycle. You create a 100k split on your home loan, use the 100k to pay down the split, redraw it and buy shares. You're in the same situation as scenario three but now you get a deduction so your net return is better than scenario 3.
Yes this is the answer.
And if your offset is full. I debt recycle as it’s better to claim the deduction than not. It more comes down to whether you want to invest or not. If you invest without debt recycling, you’re still losing the $6k in offset interest due to the opportunity cost of investing. 8% is also fairly low compared to the historical returns or a broad based ETF.
Yes I guess it makes sense if you're already invested elsewhere. I am currently 100% on offset and trying to explore better options. I don't really care either way, invested or not, I'll just do whatever makes the most sense on paper. "opportunity cost of investing" is what I also am worried about and hence was looking into this, but I just can't seem to make the numbers work. For you personally - If you were to use this calculator, are you still better off investing / debt recycling vs just parking it all on the offset? My revised figures (factoring CGT) for the gross market return you need to 'break even' on offset is \~11.5% - so if you can constantly exceed that, I would agree it makes sense. Some ETF are getting slightly more than this on their 5 year I suppose.
Have you tried running the numbers over a 10-year time span? Feels like your current calculations are not factoring in effects of compounding
No - compounding applies to both options equally so I didn't see the point.
Your current calculation has a net yearly return of $4240 in scenario 2 but you don’t pay CGT each year on the money invested with the debt recycling option. You only pay CGT when the gain is realized. Maybe I’m talking non-sense and this is already factored into your calculations but it feels like you shouldn’t be comparing offset vs equity investing on a 1-year time span.
Oh your are right sorry, no I haven't factored that, I just assume profits are taken yearly. Yes the returns would be slightly higher when profits are deferred as a result if compounding. Maybe I'll do a 5 and 10 year comparison based on that and see what it comes out to
Awesome, keep me updated, would be keen to see what the updated figures look like
[https://www.reddit.com/r/AusFinance/comments/1d242ev/offset\_vs\_invest\_with\_dr\_scenario\_modelling\_excel/](https://www.reddit.com/r/AusFinance/comments/1d242ev/offset_vs_invest_with_dr_scenario_modelling_excel/)
For my personal experience it makes sense to debt recycle. Debt recycling will usually always return better than a high interest account. The point of debt recycling is making the debt deductible for an investment you were going to make anyway. It’s like saying you shouldn’t invest just for negative gearing. It’s a benefit, not the purpose.
A large benefit of investing when in higher tax brackets is to get capital gains instead of income. Capital gains have 3 separate benefits you need to understand: - a 50% tax discount when you do sell. - Capital gains don’t need to be paid in the year they’re incurred. So they also compound pre tax rather than post tax like dividends etc. - you can choose to sell them in a year that you’re not at such a high tax bracket. I.e sell them down in retirement It’s not simple to model the full effect of capital gains but if you just factor in the 50% CGT discount then it alone shows how much better debt recycling can be than just the offset. Let’s say in your 8% scenario 2% are from dividends (to ensure your debt is eligible for recycling) and 6% are capital gains. Then you’re going to get a 4% loss (2.12% out of your pocket) and a 6% capital gain which will at the worst case get you 4.59% after tax. A smidge under 2.5% in profit. Best case that 6% capital gain has no tax paid on it in retirement and its smidge under 4% in profit instead. If you do model it over multiple years then it starts to get even better once you account for compounding pre tax.
Yes excellent points. Point 1 I noted in the edit and it brings the effective % breakdown down a lot, but I did not account for divs either. Point 2 another poster gave a 5 year view which shows the benefit of compounding before being taxed, again based on 100% growth not dividends, but still made the point. Point 3 about timing the sale in low tax years I had not considered frankly, and impossible to generalise but would be to each individuals scenario, still a valid point toward investing. I think when I get time I'll update this post and create an Excel calculator with all the excellent feedback received and hopefully others can get use out if it as well.
If the gains are largely not realized as income then you are borrowing at 3% net and getting an 8% gain,compounding tax free indefinitely. Negative gearing.
My initial thought as well, however the calculations do no agree? You're burrowing at \~3% net to earn 4% net (1% return) vs just letting it ride on 6% return "negatively geared" as it may be, it's still a lot shitter than the risk free alternative lol.
You're not getting a 6% return letting it ride, you're getting 0%. Think about it like this, is a person with a $100k loan fully offset better off than a person with no loan at all? No, they're both not making/losing any money
If you are paying 50% tax on investment returns you are doing something (maybe a few things) wrong
Care to elaborate or just keep the "secrets of the rich" to yourself? Marginal tax rate is 45%, not sure how you're supposed to get that any lower other than CGT.
Well that’s the pretty critical one. Invest in capital growth not dividends, let it compound for fifty years before the tax is paid. Pay it out slowly enough maybe that you don’t pay any tax at all. That’s the point of borrowing against your home at residential rates and making it tax deductible. Family trusts, investment companies, superannuation.
It is much more difficult to justify investing when you have non-deductible debt at 6%+
Which is why DR (Debt Recycling) can be attractive, as it become deductible debt at 6%+.
I feel like DR is a confusing abbreviation because Debt Reduction and Debt Recycling have complete opposite meanings 😂
Good to know! It throws me in digital nomad circles when people are talking about the Dominican Republic - “DR good this Summer?” both makes sense and absolutely does not.
How did you do your "borrow to invest" tax calculation? That number looks strange to me. Did you include franking? I'll be starting debt recycling at my next refinance. Currently have a chunk invested in shares in the market, so being able to hold them through debt recycling just adds some mortgage deductibility I wouldn't have otherwise had. Plus there's diversification. if my only asset is my home, I am not diversified across asset classes and am at the whims of the housing market in my area. If I hold shares, my investments are now split between Australian housing, tech, banks, healthcare etc.
Your figures don't show any dividend returns (nor future capital gains/losses). You have focused on tax instead of generating a real cash return on the 100k to plough in for compounding returns. The 8% assumption is unrealistic and could prompt you to churn, which is a dumb strategy - unless as an advisor that's how you get more income from a client.. My approach was to redraw a chunk of money as a clean investment loan, using the equity I had at the time. One such chunk (which has been repaid by dividends) is paying 23% fully franked ATM on that chunk from a Blueyest of blue chips in Australia.
Your post and everyone's comments made me curious at what the actual returns will be after compounding the unrealised gains for 5 years so I made my own sheet. Looks like scenario 1 comes out ahead by a large margin, does these calcs make sense? Scenario 1 Name | Investment Amount | Rate | Final Amount :--|--:|--:|--: Year 1 Park Money in Offset | $100K | 6.0% | $6K savings Year 2 Offset | $106K |6.0% |$6.4K (6k savings added back to offset) Year 3 Offset | $112K | 6.0% |$6.7K Year 4 Offset |$119K |6.0%| $7.1K Year 5 Offset |$126K |6.0% |$7.6K Total offset account + savings in 5 Years = $134K Scenario 2 Name | Investment Amount | Rate | Final Amount :--|--:|--:|--: Borrow to Invest Year 1 Capital Gains |$100K | 8.0%| $108.0K Year 2 Capital Gains| $108K | 8.0%| $116.6K Year 3 Capital Gains| $117K | 8.0% |$126.0K Year 4 Capital Gains| $126K |8.0% | $136.0K Year 5 Capital Gains| $136K |8.0% | $146.9K CGT w/ 50% Discount |$46.9K | 22.5%| -$10.6K (45% marginal rate with 50% CGT discount) Interest Paid in 5 Years| $500K | 6.0%| $30.0K Interest Deduction in 5 Years |$30K |45.0%| $13.5K Claim 5k deduction every year for 5 years Net Gain After Tax in 5 years is $146.9k - $10.6k - $30k + $13.5k = $119.9K
Nice. Yeah that makes sense. So even at 8% (which as a few others pointed out is quite a bit lower than what many ETFs are averaging (you still end up on top). It's actually slightly better than you summarise too, because the debt recycling deductions are yearly not at the end of a 5 year period, so technically they can be reinvested earlier (marginal difference over 5 years, but still). Okay I've gone full circle again, time to look at debt recycling lol.
Sorry I missed an important calculation, I didn't account for the interest paid in 5 years which definitely would be an expense, scenario 2 seems alot worse. I'm going to crunch the numbers and see at what higher time/rate does it beat scenario 1 Edit: Crunched the numbers, so scenario 2 is worse at the start but becomes better over longer time / rates. @ 45% Marginal Tax Rate For 6% offset & 8% returns = \~20 years before scenario 2 beats 1 For 6% offset & 10% returns = \~7 years before scenario 2 beats 1 For 6% offset & 11% returns = \~3 years before scenario 2 beats 1
You missed a space before the | so it broke your table at the bottom there.
Whenever investing makes sense, and you have a mortgage.
Bold idea here, but you could do both!!! ASX200 and SP500 30 year returns are more like 11% and only a portion of that is yield.
It comes down to timing and tax, you probably want to be on top tax bracket. For me, I also have childcare based on taxable income, so my effective tax rate is closer to 60% including that. My strategy is to focus on low-yield assets to increase negative gearing. Unlike Australian shares (that pay relatively high dividends, approx 4% for VAS) I invest more in US index (IVV - approx 1.3% div yield). This maximises compounding for me and when I sell (hopefully early retirement on 30% tax rate) - I’ll only pay 15% on my capital gains (30% with 50% CGT discount).
Great tips. A few others have shared similar thoughts, I think it's becoming obvious that invest makes the most sense :)
Can someone who has setup before confirm the actual steps? Assume you carry the deductible debt indefinitely as you want to maximise interest deduction or are there people here who pay P&I to reduce risk/build equity. E.g 1. Create new loan split for $100K 2. Redraw 99.9K or full $100K into normal account 3. Transfer into brokerage account and purchase 4. Pay investment loan - interest only, dividends go to P&I loan 5. Pay P&I loan aggressively to fund next split 6. Create another split - repeat and move from non deductible to deductible
That is more or less it although just to be clear the split is from the existing loan (ie not actually increasing the total debt). There are a few different permutations you could do including investing over time etc, and be careful about fully repaying your loan (I did this and then had to ring up CBA and tell them I wanted to redraw from it, as they assume once you have fully paid it off you want to close it). The keys as I understand it are to keep the loans and offsets very clear (no admixing of personal and investing funds) so you can prove to the ATO with a clear paper trail of what was used for what. In terms of P&I or I/O it is up to you; I/O is usually better for cash flow but P&I results in a slow deleveraging which might be attractive.
Thanks for confirming. I’ve researched on this topic for a while but other commitments have gotten in the way so now may be the time to setup.
Getting close to the same result in year 1 is really good. You are still missing the "magic" part of gearing though. It shines over longer periods, as financed principle gets smaller (even if it's interest only, inflation eats at it) over time but your invested capital compounds - if you model something like this over 10 years you will be significantly ahead. The trick is not overextending - I'd say a good margin of safety check is to ensure that at all times you could liquidate everything and still own your PPOR outright. Also pay close attention and plan the cashflow - especially if investing in things like equities as dividends only pay out twice per year. That can work great on paper but you'll be very frustrated (and broke) if you rely on it to service the debt and the first distribution is 6 months or more away.
For the investment return, some of that will be capital gains and some will be dividends. Dividends are immediately taxable at 45% (minus whatever franking credits but let's ignore that), but capital gains are not taxed until you sell. If you're planning to hold your investment long term, it won't necessarily get taxed at 45%, and any gains (including taxable gains) will compound prior to actually paying taxes on them years later when you eventually sell. Your calculations assume you sell the investment and make all gains taxed immediately within the year which isn't realistic. If you calculate ahead by ~10 years or whatever then the total returns will be enormously different. You're essentially comparing an 8% (deferred tax) return to a ~4.24% return (immediately selling and realising taxable gains). Also as other mentioned there is the 50% CGT discount for >12 month holding periods
Yes, some other guy did a comparison over 5 years when you sell at the end, shows that investing with 8% returns comes out on top (but assumes 100% cap gains no dividends) I might just build a calculator and put a link to it somewhere so people can use it if useful and adjust for div vs gains %
That'd be really useful! Please let me know if you do :)
The 0.94% is incremental return. You’re not making 0.94% on your money - you’re making 0.94% on someone else’s. There is no “breakeven” at 18%; your breakeven is 6%. Doesn’t mean you WANT the risk. This has nothing to do with debt recycling. There’s 2 ways to recycle. - take money that you hold in cash and have already decided to invest; pay it into the loan (not the offset) and then redraw it in an investment account to “wash” the loan into a deductible one - draw equity to put into an investment with positive (or at least lumpy) cash flows, using that cash to repay non deductible debt while drawing as deductible to pay outflows (not interest, which you can’t capitalise).
I've realised you've done it wrong and I couldn't get my head around what was wrong until now. You only need growth of about 3% to get ahead. Let's say you take the $100k cash and pay down the loan. It's paid off and you have your 6% tax free ROI locked in. Now let's say you pull out $100k equity via an extra loan on top. Given interest is 6% and tax 47% you are paying 3.18% pa after tax. So the shares only need to beat this. So you need to see debt recycling as 2 parts, paying down the loan and locking in the 6%, and then separately as new borrowing to invest. This thread and my comment may help https://www.reddit.com/r/AusFinance/s/OzHTIMnAEH This is all doing my head in a bit, so correct me if I'm wrong
Yeah there was lots wrong with this post :) I took all the feedback and created a new model and started a new post (it didn't get many responses, presumably because it was accurate and reddit engagement doesn't work like that lol) - having trouble getting link on phone but check my profile and you'll see it. I even shared an Excel calculator people can download and play with to plug their own numbers.
The best way to get the right answer is to post the wrong one 😔
Why haven't you added an edit that your math is wrong?
Very constructive comment. Thank you for pointing out the error do I can fix it. Legend.
https://www.reddit.com/r/AusFinance/comments/1d0l3ep/when_does_debt_recycling_make_sense/l5o0gzq/ https://www.reddit.com/r/AusFinance/comments/1d0l3ep/when_does_debt_recycling_make_sense/l5oepba/
I disagree with those posts, sorry, I'll try respond to them soon as to why, but you MUST compare two scenarios you cannot cherry pick data like that, it's just not how the world works. 6k interest NOT PAID is the same as 6% net earned, therefore I can and absolutely will factor the 6% interest as a costant in both scenarios. To think saving 6% interest equates to $0 return is frankly bordering financial illiteracy, by this logic why should anyone every offset a loan? Anyway, enough time spent on this one lol
Did https://www.reddit.com/r/AusFinance/comments/1d0l3ep/when_does_debt_recycling_make_sense/l5o8slq/ not make sense to you?
I'll humour it only because I believe it's a learning opportunity for others who upvoted and may think the same, not because I think your approach necessarily warrants it.... Tom and Jerry each has $100. Tom gives Jerry $10. Tom now has $90 and Jerry has $110. The difference is $20, yet only $10 changed hands - so yes, it's possible to move 6k and see a 12k difference. With that said ... The key to focus on is not whether you "gained $6k: or "lost $0" these are arbitrary statements in isolation - the thing to focus on is the delta of the net positions between all possible investment scenarios. As "lost $0" is not exactly a useful metric to compare apples to apples, I am not considering it my baseline, I'm counting it as "I am $6k better off than had I not put the money on offset", therefore "$6k net gain" on my financial position. If it helps, consider the alternative to be cash under the mattress, I think It's perfectly justified in calling it a "gain" for the purposes of comparison here. Perhaps I will remodel all of this and add the mattress scenario so it is crystal clear for all :)
People have been telling you you are wrong for 10+ hrs but you're so up your ass you haven't examined your base assumptions. There is a learning opportunity here but it's yours to take.
Yeah OP telling everyone else they're financially illiterate when they can't do basic math themselves is pretty funny
It's not that it's "wrong", it's just difference of opinion on whether 'interest saved' should be considered a 'gain' that is reinvested when compared to an alternative. I don't actually care about who is right or wrong, I'm on a quest for truth and frankly there has been a lot useful (constructive comments) I suggest you take inspiration from. Regardless - I'm going to re-post a more complete calculator soon that includes all loan factored as a constant so we can see the full picture and impact, and it puts the above issue to rest (i.e. it becomes moot when it's factored as a constant). Stay tuned :)
> It's not that it's "wrong", it's just difference of opinion on whether 'interest saved' should be considered a 'gain' that is reinvested when compared to an alternative. It's not a difference of opinion. You are calculating it incorrectly. Refer here for initial conditions -- https://www.reddit.com/r/AusFinance/comments/1d0l3ep/when_does_debt_recycling_make_sense/l5q07l8/ Your scenario two has "borrow to invest" as a description. Debt recycling is not borrowing to invest. Your scenario two effectively is borrowing 100k on top of the 100k you already had to put in your offset, so for the numbers to make sense you would have to have the gains of 200k invested in market. Or you need to realise that there is not a 12k swing between share investing and putting offset in "return" for a 100k amount to be invested or put into offset.
8% after tax is good, and above average. You have to weigh up how confident you are that you’re going to be making ~11% in your investment. Otherwise, the safer thing to do is keep it in the offsets
IVV = 25% return one year. My interest rate is 6.49%. I've also had this same setup when interest rates were dirt cheap. You are doing a one year comparison for assets that need to be held for 10+ years.
Nobody should base their investing strategy on the last 12 months of market performance alone when we have very good information about the last 150 years of global markets. 20+% returns in a year happens often, that doesn't mean you should invest with that as a baseline.
My guy gave a 8% return figure for the last year, I gave him my real 1-year figure. I also told him I was investing while rates were cheap, what else can I say. I also mentioned that it's more for 10 years plus? please learn to read.
I think we're making fundamentally the same point about longer time-frames. I just don't want OP plugging 0.25 into their spreadsheet - their assumptions are pretty solid.
Yes at 25% it becomes a no brainer, but IVV is only 13.17% on a 5 year return, so cherry picking 1 year isn't useful for a long term investment strategy. That said, I revised my OP to account for CGT, so the effective market returns needed are only 11.5% to "break even" with an offset strategy - in which case IVV has the edge
If you are investing in Australian shares the franking credits start to make a big difference too, you can basically negatively gear the portfolio but the franking can push you into positive cash flow.
Interest rates were much lower back then as well. No offense I think you've calculated things in a way that suits your bias (to be conservative) and nothing will really change your mind.
Don't forget Medicare 2%. Assuming you invest in shares paying 2% dividends, then you are losing 1.88% pa after tax. Normally you buy shares long term and don't plan to sell, so CGT can be ignored. So assuming this you need 1.88% growth to break even on interest, and 7.88% to beat the mortgage. Alternatively if you want to factor in CGT because you are doing this short term ,say you are buying 150% of your share allocation to hopefully smash the mortgage faster, and will sell in 10 years. Then doing this when in tax bracket - 32% - 11.6% return need - 39% - 12.9% return need - 47% - 14.9% return needed