Last Updated 02/06/2026
Debt recycling is a wealth-building strategy that converts your non-deductible home loan into tax-deductible investment debt, helping Australian homeowners pay off their mortgage faster while building an investment portfolio.
Debt recycling, also known as mortgage recycling, is best suited to homeowners with equity in their home, a stable income, and a long-term investment horizon – typically seven years or more. High-income earners can benefit particularly from the strategy, as larger tax deductions apply at higher marginal tax rates.
This guide covers:
Or if you’d like to find out more about how debt recycling may apply to your specific financial situation, you can talk to an investment advisor.
Debt recycling is a way to turn your existing bad debt, such as your mortgage, into good debt that is tax deductible.
Debt recycling, at its most basic form, involves leveraging the equity in your non-tax-deductible asset, i.e. your mortgage, to invest in an income-producing asset (which you can claim a tax-deduction on). You then use that income to pay off your home loan. Once your home loan is paid off, you only have the tax-deductible loan on your investment assets to pay.
Look, I know it can sound complicated! Keep reading, as we’ll explain everything in this comprehensive guide.
We define good debt as a debt that is tax-deductible, or is owing on a nest egg asset which is helping you grow your long-term wealth. Bad debt, on the other hand, is any that is not tax-deductible and/or is not owed on an asset that is helping you grow your wealth.
Common examples of bad debt include car loans, credit card debt and even the mortgage on your principal place of residence. Yes, that’s right, while owning a home can have a number of financial benefits, your mortgage may actually be considered bad debt! This is because, even though you’re paying off an asset, you’re not getting any income or tax benefits out of that money in the meantime.
That’s where debt recycling comes in.
This is an example of debt recycling. You’re paying off your mortgage and realise that you’ve built an equity in your home of $300,000. You draw out some of that equity and invest it into a rental property or shares – some kind of income-producing asset. The interest on the investment loan to purchase the income-producing asset is tax-deductible. And now you use the tax savings and investment income to pay down your outstanding home loan balance more quickly.
Here is an expanded example: a homeowner has a $600,000 mortgage and makes $1,000 in extra repayments each month. Rather than simply reducing their loan balance, they redraw that $1,000 and invest it into a diversified share portfolio. The interest on the redrawn $1,000 is now tax-deductible. Over time, their non-deductible home loan balance shrinks, their investment loan grows by the same amount, and the investment income and annual tax refund are directed back into the mortgage – accelerating the process further.
Debt recycling does not increase your total debt – it restructures existing debt from a non-deductible to a deductible position.
If you simply invest rather than recycling your debt on your home loan, you won’t receive the tax benefits of the income-producing asset. This is because you now have a tax deduction – where before, you didn’t.
If you simply invest rather than ‘recycling’ your debt on your home loan, you won’t receive the tax benefits of the income-producing asset. This is because you now have a tax deduction – where before, you didn’t.
Now it’s important to realise that you’re not actually ‘increasing’ your debt. As you continue to pay off your home loan, you can draw that money out to invest. You are then creating multiple assets, one of which is producing income that helps to offset the costs of the other.
More importantly, you are able to use that income to pay off your non-deductible loan more quickly. Typically, you’ll see the non-deductible home loan shrink over time, while your ‘tax-deductible investment loan’ grows. The idea is to keep recycling your debt until you have effectively moved all your debt into a tax-deductible position.
Now you might wonder why you don’t just invest, without drawing out your equity to do so? Great question – simply put, if you do that you won’t access the tax savings on the interest. And these savings can be very significant over time. Debt recycling can particularly benefit those with a high income who may otherwise end up paying more in tax.
Debt recycling typically follows a structured, repeatable process:
Loan structure is critical. The split must be set up correctly from the start to maintain ATO deductibility – if investment and personal debt are mixed in the same account, you risk losing the tax deduction entirely. Getting this right from day one is one of the strongest arguments for working with an experienced financial adviser and mortgage broker before starting.
Here’s a video from our licensee company, GPS Wealth, to help you understand what debt recycling looks like in action:
But I do want to emphasise, debt recycling is not a strategy that is ideal for everyone. There is a level of risk involved in managing two loans instead of just one.
Since you will end up with two loans during this process, both of which will likely be leveraged against your principal place of residence, you need to be comfortable and confident you are able to keep paying your loans.
While using a debt recycling strategy can help you amplify the benefits of investing and build your wealth in a quicker and more efficient way, it also amplifies the risks you may encounter if there is a market turndown.
Determining whether debt recycling is the right strategy for you will depend on your risk tolerance, the time until you need to access your investment assets and your short, medium and long-term financial goals.
When we approach this strategy with our clients, we carefully evaluate each element of your financial situation to ensure that debt recycling is the right fit for you and your unique financial circumstances, and that it will achieve what you want it to.
The primary tax benefit of debt recycling is that interest on money borrowed for investment purposes is generally tax-deductible under Australian tax law.
The ATO doesn’t look at where the loan is secured, it looks at what the money is used for.
So if you borrow against your home and use that money to buy investments that earn income, the interest on that part of the loan can usually be claimed as a tax deduction.
There is an additional tax advantage for investors who hold Australian shares: franking credits. When companies pay you dividends, they may already have paid tax on their profits. With fully franked dividends, you get a credit for that tax. This can lower the tax you owe or even lead to a refund, depending on your personal tax rate.
Higher income earners benefit most from debt recycling because larger deductions apply at higher marginal tax rates. For someone on a 47% marginal rate (including Medicare levy), a $10,000 interest deduction is worth $4,700 in tax savings. For someone on 32.5%, the same deduction is worth $3,250. The strategy’s after-tax advantage scales with income for maximising your tax benefits.
Tax outcomes will vary depending on your individual circumstances. We recommend speaking to a qualified adviser – our tax advice team can help you understand what applies to your situation.
In a nutshell, when debt recycling is done right, you’ll have the benefits of
Just like many financial strategies, debt recycling can have different benefits depending on your particular financial situation, income and future financial goals. One of the most important benefits of debt recycling is that it helps you build an investment portfolio and grow wealth faster.
In the traditional route, you would pay off the mortgage on your family home first before building an investment portfolio. But, that means that you are sacrificing the compounding returns you would have gained had you started building your investment portfolio earlier. When you consider that it takes 25-30 years for the average family to pay off their mortgage, the returns you potentially miss out on over that time will have a significant impact on the likelihood of you achieving other financial goals – or building wealth for retirement.
Finally, utilising a debt recycling strategy can allow you to build a diverse investment portfolio from the beginning. While a more traditional investment strategy would lock you into one type of investment – for example property – until it was completely paid off, debt recycling can be used to free up extra money that can then be used to invest in shares or other diverse investment assets such as investment properties. This way you not only gain the benefits of compounding returns but also ensure that your wealth is spread across multiple asset types and sectors as it continues to grow, thus protecting it from market downturns when they occur.
While debt recycling does have a number of benefits, there are a few downsides worth considering – especially if your strategy is not structured correctly or you don’t have the required income to support the endeavour over the long term.
The number one thing you should know before considering debt recycling is that just as your returns are compounded, so too are any losses you might suffer when markets experience a downturn. Since you have debt owing on two types of investment assets, when the market experiences a turn it’s highly likely you will feel it on both sides.
In most debt recycling strategies, the asset that your strategy is leveraged against is your family home. You have to be comfortable with the level of risk associated with this strategy.
It is also due to this increased risk factor that we usually only recommend debt recycling as a longer-term strategy. This allows you time to recover from any market dips that might occur, before you have the need to draw out the income from your assets. In fact, we usually like to start with an investment timeframe starting at 7 years, with a longer time frame generally leading to better benefits.
Debt recycling is most effective for those with a secure income, who will be able to comfortably service both loans (and who’ll benefit the most from the tax advantages). However, depending on the situation, we also use the strategy successfully with clients who are looking to purchase their first investment property using the equity in their home.
If you are able to tick the financial boxes, it’s also important that you have a sufficient amount of personal protection to ensure you or your loved ones are able to continue meeting your loan repayments in case something unexpected happens. You can also speak to a financial advisor about what insurances are recommended in these situations.
Debt recycling and using an offset account are both strategies for managing your mortgage, but they serve very different purposes.
Offset Account | Debt Recycling |
|---|---|
| Reduces interest on home loan | Converts non-deductible debt to deductible debt |
| Funds remain accessible and liquid | Funds deployed into income-producing investments |
| No investment market exposure | Generates tax deductions and potential investment returns |
| Lower complexity and risk | Higher complexity, requires careful loan structure and ongoing record-keeping |
Some people actually use both strategies together, keeping an offset account for short-term cash flexibility, while using debt recycling for longer-term wealth building.
The offset acts as a handy buffer and helps cut down daily interest. Meanwhile, the debt recycling side does the heavier lifting by gradually converting non-deductible debt into deductible debt over time.
One key difference to keep in mind: most experienced practitioners suggest keeping extra cash in an offset account rather than letting it sit in a redraw linked to the investment loan. Mixing those two can make your records more complicated if you ever need to deal with the ATO.
Whether it is worth it for you depends on how this technique will affect your current financial situation and your future investment goals.
Before building a debt-recycling strategy on your own, we highly recommend speaking to a financial professional who has experience in this area. This is because your situation can really impact how successful you will be in using the strategy. And you need to know what the outcomes might be in order to 1) protect yourself, and 2) achieve the financial security you desire.
However, as we’ve covered, there are a bunch of great outcomes for those who are in a situation to use this strategy. These include:
Indirectly you are able to diversify your portfolio into things like shares or other properties, and potentially even achieve some passive income from any positively-geared investments. Having other assets that you need to look after, such as investment property, can also be used to reduce your taxable income. Not to mention the ongoing benefits of growing your family wealth. This truly is a long-term strategy.
What debt recycling is not. Debt recycling isn’t a magic bullet for your bank account. In order to be successful, it requires the same perseverance and good savings and money management skills as any other financial strategy. Not to mention, the ability to follow through on paying off your debts!
Experienced investors may feel confident of managing this kind of strategy on their own. Nevertheless, we recommend that most people seek the advice of a financial advisor, who is capable of evaluating their current financial situation.
You can assess whether debt recycling is the right strategy for you by looking at a few areas of your financial life.
Once those practical questions are answered, you need to consider what you want to get out of this strategy.
If you feel comfortable answering yes to these questions, then debt-recycling could be a good option for you. If you’d like to discuss your eligibility for this kind of strategy, you can call our office on 07 3852 4114 to talk with a financial advisor.
These strategies are a completely legal way of using your debt to reduce your tax. Keep in mind that the Australian Tax Office is very clear about what you can claim in this regard. You can only claim interest on a debt that has been incurred for an income-producing purpose, according to the official statement.
Another thing to consider is how to approach your loans. There are a variety of methods and rules around loan splits, using your offset account effectively, and even ensuring that your home loan has the flexibility for this strategy. Some professionals will also recommend using different combinations of interest-only loans and principal-and-interest loans to achieve the most efficient financial result.
We won’t go into too much detail here, as these complicated decisions are so particular to each individual. We recommend getting financial advice, and also speaking with a mortgage broker if you are not sure what your current loan will enable you to do.
In summary, debt recycling is a wealth creation strategy that can be beneficial if you are an investor who is comfortable with the risks, has access to good advice, and has the means to support your strategy.
If you think debt recycling sounds like something you’d like to consider to help you build wealth, you’re welcome to contact our team for a free consultation.
We provide professional advice to everyday families, and we’ve helped many of them grow their wealth using techniques such as debt-recycling. We get to know you and then we assess your situation and short, medium and long-term goals before guiding you in making the financial decisions that will really make a difference.
Get In Touch With An Investment Expert Today
Debt recycling is a strategy where Australian homeowners use equity in their home to invest in income-producing assets, gradually converting their non-deductible home loan into tax-deductible investment debt. Over time, investment income and tax refunds are redirected to pay down the home loan faster while a share or ETF portfolio grows in parallel.
Yes. Debt recycling is a legal strategy under Australian tax law. The ATO confirms that interest on borrowed money is deductible where the funds are used for an income-producing purpose. The key is that the loan must be structured correctly and the funds must be traceable to their investment use. You can refer to the ATO’s official guidance on interest deductibility for the precise rules.
Most lenders require at least 20% equity in your home to avoid Lenders Mortgage Insurance (LMI), though the more equity you have available, the more debt you can recycle at the outset. Your lender will also assess your income and overall borrowing capacity. A mortgage broker can help you understand exactly how much equity is accessible in your specific loan structure.
The most common investment vehicles are shares, ETFs (exchange-traded funds), managed funds, and investment property – all of which generate assessable income through dividends, distributions or rent. The critical requirement is that the assets produce income, as this is what makes the interest on the investment loan deductible under the ATO’s purpose test.
Debt recycling restructures your existing home loan debt into deductible investment debt – it does not increase your total borrowing. Negative gearing involves borrowing specifically to invest in an asset where the costs (including interest) exceed the income generated, with the loss used to reduce your taxable income. They are different strategies: negative gearing is often used with investment property, while debt recycling is about converting the debt you already have.
Rising interest rates increase repayments on both your home loan and your investment loan split, which is why stable income is so important before starting. Higher rates also increase the size of the interest deduction, which partially offsets the cost – but the net effect depends on your tax rate, investment returns, and cash flow buffer. This is one of the key risks of the strategy and should be stress-tested before you commit.
Professional advice is strongly recommended. The loan must be structured correctly from the start – mistakes in how the accounts are set up can cost you the tax deduction entirely and are difficult to fix after the fact. A good adviser will also model the strategy against your specific income, loan balance, investment horizon and risk tolerance to confirm it suits your situation before you begin. Our team at My Wealth Solutions can walk you through whether it’s the right fit.
Co-founder and Director of My Wealth Solutions, Guy has around 20 years of experience in holistic financial planning and wealth management.
B. Biomedical Science, Dip. FP, Adv. Dip. FP, SMSF
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