Peter Thornhill: Debt Recycling strategy

by Darren

We own our house (discharged mortgage) yet find Peter Thornhill's Debt recycling strategy to build a share/LIC portfolio totally fascinating. Are you able to give us a better understanding of setting up a line of credit or at least how to calculate the "2-3 years of dividends loan size" as per Peters suggestions?

ANSWER FROM PETER THORNHILL (received 25th Jan 2019):

With a debt-free home the strategy is even simpler:

You put up the property as security for a line of credit. This ensures your interest cost will be a lot less than a margin loan where the shares are used as security.

It also means you will never have a margin call.

Theoretically the loan should be at the best home loan rate the bank has to offer as the security is exactly the same as if you were borrowing to buy a property.

Also, the amount will be nothing like a 'home loan' so the banks security is very high.

Look at a principal and interest loan as they will try and charge you more for an interest-only loan.

Despite all that they will try and stitch you up with a more expensive rate so negotiate hard or use a mortgage broker.

Point out to the bank that if they deal with you direct they won't have to pay a trail commission to the broker!

Back to the main game; the loan interest will be tax deductible as will any other costs associated with the transaction as it is being used to purchase income producing investments.

Without a mortgage, the dividends can be streamed straight back into the line of credit which can then be redrawn at will.

We use this as a means of amalgamating a number of smaller amounts (dividends) and investing that in lump sums. Usually when the listed investment companies have a rights issue of new shares or offer a share purchase plan to existing shareholders.

Both of these come with zero brokerage fees and often at a small discount to the then current price. It was a great discipline for our 3 sons as they took them up when they arrived without a debate about whether it the right time to invest. Looking back now, Frieda and I have 22 purchases of Argo over the years. Some high, some low but all less than where they are today.
Also, you buy lots when they are cheaper and less when they are more expensive. I defy anyone to time the markets successfully.

My comment about borrowing 2-3 years' worth of current dividends is aimed beginners. If the property is currently debt free you can borrow whatever you are comfortable with.

We are currently paying 4.8% fully tax deductible and the shares are producing about 4.3% plus franking credits. We are ever so slightly positively geared.

Can I just say that in the eyes of most Australians that would be perceived as silly; what you want to do is be negative cash flow so that you can claim a tax deduction for the amount you are losing; go figure!!

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Aug 08, 2019
by: Anonymous

I'm trying to get my head around the risk management side of things.

Example 500K property
400K loan
100K invested in LICs
50K in offset account
0 redraw currently available in loan

10 years of dividends from from the 100K portfolio assuming no dividend growth is approx 50K. Put 50K from offset account onto property, split the loan, withdraw 50K and invest to give a total of $150K portfolio.

Final result
150K share portfolio
$400k debt made up of 50K "good" debt and 350K "bad" debt.

Would one be any more risk exposed if they were to liquidate the existing 100K portfolio put into loan and redraw along with the 50K to invest?

Final result
150K share portfolio
400K debt made up of 150K "good" debt and 250K "bad" debt

Jan 21, 2019
Debt recycling
by: Mike


I found what Peter was saying fascinating as well. Congratulations on discharging your mortgage. That is an excellent achievement that gives you more flexibility and freedom in the future.

From what I understand, Peter was implying that the line of credit gives you more flexibility in raising cash against the equity on your house. The main advantage to a line of credit is the mortgage interest is tax deductible where as it is not tax deductible on a regular mortgage. This means that if your income from the borrowed capital that is now invested is greater than the cost of the line of credit then you'll be generating "free cash".

There are a couple of warnings I can see that you may need to be aware of. I've had a quick look at the market and the lines of credit interest rates are a little higher than a normal mortgage (of course that is not factoring in the interest deductibility). Here is a page with the latest rates:

The other thing you should be aware of is that dividends can be cut so, to service the loan, you should make sure you have an alternative source of income as a back up.

Peter advises that when you are comfortable with the strategy and built it over several years you should look to borrow a few years (up to ten I believe) worth of dividends. This means you will have more cash up front to invest and add to your income immediately. You are simply using capital to buy yourself an extra income.

I very much like this quote from Peter:

"I mean Frieda and I are now 70 years old and we still run debt on our personal balance sheet because with the interest rates as low as they are presently the tax-deductible interest that we pay the bank is less than the dividends that the shares are paying us, we're actually being paid to borrow money because the shares pay me more than I pay the bank. What can I say to you – you'd be nuts not to do this!"

I hope this somewhat helps to answer the question but we will email Peter ourselves to see if he can give you a greater overview of what he is laying out. We'll keep you posted!

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