At the TAXATION , we aim to help clients make smarter financial decisions that balance debt management with wealth creation. One strategy that is gaining popularity in Australia is debt recycling. It can be a powerful way to reduce non-deductible debt (like your home loan) while building an investment portfolio. But how does it work, and is it suitable for you? Let’s break it down.
What Is Debt Recycling Strategy?
Debt recycling is a financial strategy that converts non-deductible debt (for example, your home loan) into tax-deductible investment debt.
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Non-deductible debt: Debt where interest cannot be claimed as a tax deduction (e.g., owner-occupied mortgage).
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Deductible debt: Debt where interest is tax-deductible because the borrowed money is used for income-producing purposes (e.g., buying shares, managed funds, or investment property).
The goal is to gradually reduce your home loan (non-deductible) while simultaneously increasing investments funded by tax-deductible borrowings.
How Does Debt Recycling Works in Australia?
Here’s a simple step-by-step example:
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Starting point:
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Home loan: $500,000 (non-deductible debt).
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Offset savings: $20,000.
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Available redraw/loan facility: $20,000.
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Step 1 – Make repayments: You pay down $20,000 off your home loan, reducing the balance to $480,000.
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Step 2 – Reborrow for investments: You immediately redraw $20,000 from the loan and use it to invest in income-producing assets (shares, ETFs, or managed funds).
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Step 3 – Tax effect:
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The $20,000 portion of the loan is now investment debt, meaning the interest on that portion is tax-deductible.
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The home loan balance is still $480,000 (but only $460,000 is non-deductible now).
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Step 4 – Recycling:
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Over time, as you continue making extra repayments and redrawing for investments, a greater portion of your loan becomes deductible debt.
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The investment income (dividends, distributions) can be used to accelerate home loan repayments, speeding up the recycling process.
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Quick Calculation Example:
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Loan interest rate: 6%
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$20,000 borrowed for investments → annual interest = $1,200
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If your marginal tax rate is 37%, the tax saving = $444
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At the same time, any dividends/distributions from the $20,000 investment can help reduce your home loan faster.
Benefits of Debt Recycling
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Accelerated home loan repayment
By using investment income and tax savings to pay down your home loan, you can become debt-free sooner. -
Tax efficiency
Interest on the investment portion of your loan is deductible, reducing your taxable income. -
Wealth creation
Instead of just paying down debt, you are building an investment portfolio that grows over time. -
Long-term financial independence
Eventually, your non-deductible home loan could be fully converted into tax-deductible investment debt, with a solid income-generating portfolio in place. -
Flexibility
The strategy can be tailored—whether you invest in shares, managed funds, or property depends on your goals and risk tolerance.
Risks and Considerations
Like all strategies, debt recycling comes with risks that must be carefully considered:
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Market volatility: Investments such as shares and managed funds can fluctuate in value, potentially creating short-term losses.
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Increased debt exposure: You are effectively borrowing to invest, which amplifies both gains and losses.
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Cash flow pressure: You need consistent surplus income to keep paying down the home loan and managing investment interest.
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Interest rate risk: Rising interest rates can increase borrowing costs and reduce the effectiveness of the strategy.
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Discipline required: This is not a “set and forget” strategy. It requires ongoing monitoring, reinvestment, and sticking to the plan.
Who Is Debt Recycling Suitable For?
Debt recycling is most suitable for:
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Homeowners with a stable income and surplus cash flow.
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Individuals with a long-term investment horizon (ideally 7–10+ years).
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People comfortable with investment risk and market fluctuations.
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Those committed to reducing non-deductible debt while building wealth.
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Taxpayers on higher marginal tax rates, as they benefit more from the deductibility of interest.
Is Debt Recycling Right for You?
Debt recycling can be a powerful wealth-building tool, but it’s not right for everyone. If you have unstable income, a short-term financial horizon, or little appetite for investment risk, it may not be suitable.
At the TAXATION, we work with you to:
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Assess your financial goals and risk tolerance.
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Run projections tailored to your circumstances.
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Ensure the strategy complements your overall tax and wealth plan.
Final Thoughts
Debt recycling combines debt management with wealth creation, but it requires discipline, risk awareness, and careful planning. When done correctly, it can help you repay your home loan faster while building a strong investment portfolio for the future.
If you’d like to know whether debt recycling is right for you, speak with our team at the TAXATION today for personalised advice.
Disclaimer
This blog provides general information only and does not take into account your personal objectives, financial situation, or needs. Debt recycling involves risks, and the outcomes will vary depending on individual circumstances. Before making any financial or investment decision, you should seek professional advice tailored to your specific situation.
