Many investors have expressed interest in the refinance in retirement approach to financial independence, which has gained popularity in recent years.

This approach sees the investor move to retirement by building a substantial property portfolio and large base of equity.

Instead of selling some properties to pay down debt or selling the whole portfolio and investing the proceeds in a managed fund or cash management trust, refinancing in retirement leaves the property portfolio intact, using borrowings against the property equity to pay for the investor/retiree's living expenses.

While still geared (in fact, probably negatively geared) the refinance in retirement approach generates the funds to pay the groceries, put petrol in the car and support the perpetual sea-side holiday by periodic refinancings against a continually appreciating asset base.

In other words, extra debt is incurred to pay for living expenses and the interest is capitalised (that is, the interest is added to the overall pool of debt). The appreciating property portfolio ensures that the overall loan-to-value ratio (LVR) stays constant or declines, although the LVR is ‘topped-up' with every refinancing.

All of this sounds easy and attractive, not least because the investor pays no income tax (borrowings are not classed as income and hence no income tax is payable on them) and nor is capital gains tax incurred (because no properties are sold and hence there is no CGT ‘event' from a tax point of view).

There is a catch though - the trade-off for paying no tax is a menu of reasonably significant risks, including:

• the risk that loan repayment costs (ie. interest rates) rise, eating into your refinancing and adding to the growing pool of debt, and 
• the capital growth which backs the payment of your debt-funded grocery bill doesn't eventuate, or is lower than anticipated, leaving you with little or no money to pay the bills.

For both these risks, it is essential to have a very sizeable equity buffer which enables the retired investor to continue to draw borrowed funds against their equity.

Some people have asked interesting questions about this approach.

One person asked how it's possible to refinance and draw down surplus equity in retirement without an income. Surely a bank or lender would want to see a regular income to meet their debt-servicing requirement?

The answer is that the investor would set up a line of credit (possibly of the low doc variety) with a large balance. This would enable the investor/retiree to draw on their equity for whatever purpose they like up to the point at which their limit was reached. In effect it would be an asset-lend operating more like a credit card that a loan. By the time the credit limit was reached, the properties would (it's hoped) have appreciated, enabling a new limit or fresh line of credit to be established.

If the lender refused to come to the party (which is another risk with the refinance in retirement approach) the investor - who would have substantial assets, a demonstrable repayment history and probably an overall portfolio LVR of 60 percent or less (ie. an attractive client for a bank!) - could simply shop around to find a lender who would write the loan or line of credit.

Another person asked what happens to the cash loss generated by geared properties: how does it get paid?

The answer is that it doesn't - it simply gets added to the loan balance. The balance keeps rising until it reaches the line of credit limit, at which point another line of credit is opened up against the appreciated portfolio.

So the borrowing facility we're talking about for this kind of undertaking is not an off-the-shelf dedicated loan package tailored specifically to enabling property investors to retire on their portfolio. Rather, it's a way to use and adapt an existing loan type (ie. a low doc line of credit) to facilitate a switch to the drawdown phase.

To find the lenders who provide this kind of facility simply do a Google search of ‘low doc line credit' or similar. There are a raft of lenders who provide lines of credit which could be used in this way.