CALIA+ can be used to implement a number of debt strategies. Three popular strategies are outlined below.
Debt Consolidation
CALIA+ can be cost effective as it allows you to consolidate unsecured or personal debts that generally attract a higher interest rate than property secured loans. Consolidating all your debts within a CALIA+ facility is simple and could significantly reduce interest costs.
Example
Regular Savings Plans
Regular savings plans provide an easy and disciplined way to invest in managed funds on a monthly basis.
CALIA+ is suitable to clients who wish to borrow against the equity in their property to make monthly investments into managed funds. All CALIA+ variable loans are established as transactional accounts with a BSB and account number. It can therefore provide a simple and automated approach to investing in managed funds by allowing the fund manager to directly debit your investment sub-account.
Debt Optimisation
For many Australians, owning a family home is only possible with the financial challenge of repaying a large home loan. With a focus on reducing their loan as quickly as possible, wealth creation plans are often left until later in life, leaving little time to benefit from the compounding nature of investing. But with the right advice they can continue to focus on repaying their home loan while also investing to build their wealth.
This strategy is referred to as ‘debt optimisation’ (also known as ‘debt recycling’) and works by reducing non-tax-deductible ‘bad’ debt (for example your home, car and personal loans) and replacing it with tax-deductible ‘good’ debt (investment loan) which is used to invest.
A case study
Brad and Angela have a $400,000 home loan secured by the family home. They wish to retire in around 20 years and in order to pay off their home loan within this timeframe, they are currently paying $37,000 a year (approximately $27,000 in interest and $10,000 off their loan). Following a personal review of their finances they realise they have around $20,000 of surplus income each year.
They decide to visit their financial adviser to find the best use for their surplus income. During their appointment they discuss a number of strategies which include:
- Adding their surplus income to their existing home loan repayments to repay it as quickly as possible. Once repaid they would start investing.
- Invest their surplus income of $20,000 while continuing to make their current home repayments over 20 years.
Brad and Angela’s adviser suggests a third strategy called debt optimisation. Similar to the first strategy, he recommends that on top of their standard home loan repayments, they should use their surplus income to pay off as much of their home loan as possible. The strategy then requires Brad and Angela to re-borrow the equity in their home created by their total home loan repayments and invest it in managed funds.
Brad and Angela agree to a debt optimisation strategy. In the first year they managed to pay $57,000 ($37,000 current repayment + $20,000 surplus income) off their home loan — $27,000 in interest and $30,000 off their loan. Using a separate investment sub-account they redraw the principal amount that they have paid off their home loan and invest it into managed funds.
Debt optimisation – An example^
One year on
By adopting this strategy Brad and Angela’s total amount of debt has remained the same, however a portion of it ($30,000) is now tax-deductible ‘good debt’ — as this borrowing has been invested into managed funds, an income-producing asset. Brad and Angela are now entitled to claim the interest costs on this $30,000 borrowing as a tax deduction. As their investments also provide them with an additional source of income as well as franking credits, their strategy will become even more tax-effective*. The additional source of income allows them to increase the rate at which they reduce their home loan (‘bad’ debt) which in turn allows them to increase the size of their investment loan (‘good’ debt) and investment portfolio over time.
Find out more
To find out more about how debt optimisation might be able to help you, please contact your financial adviser.
Important Information
^ It is assumed that the value of investments, investment income and salary will increase over the long term. If they do not, the investment outcome may differ.
* Taxation outcomes can vary according to individual circumstances and are subject to changes in legislation.
The information has been prepared without taking account of the objectives, needs, financial and taxation situation of any particular individual. For this reason, any individual should before acting on the information, consider the appropriateness of it having regard to their objectives, needs, financial and taxation situation and if necessary, seek appropriate independent financial and taxation advice. This case study is a hypothetical example for illustrative purposes only and does not represent a forecast or recommendation. Changes in circumstances may have a negative impact on any outcome. The names and particular identifying features do not reflect any particular person. Investors should consider the product disclosure statements and documents, including risks and fees, from their financial adviser before making any decisions about this information. CALIA+ is one of the products available under the Colonial Geared Investments brand, and is provided by Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 (‘Bank’). The Bank’s wholly owned but non-guaranteed subsidiary Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814, a Participant of the ASX Group, only administers the Margin Loan Sub-accounts within CALIA+. Fees and charges apply. Please consider the full terms and conditions available on application. Only investors who fully understand the risks associated with gearing into investments should apply.