Debt recycling, explained properly

Debt recycling is swapping your home loan, which isn’t tax-deductible, for investment debt that may be, a slice at a time. You pay down part of the mortgage, borrow the same amount back through a separate split, invest it, and repeat. The total you owe doesn’t change. What changes is what the debt is for, and in Australia the purpose of the borrowed money decides whether its interest is deductible.

It sounds clever. Mostly it’s admin.

A hypothetical: the first year

Take the Chatswood couple from our borrowing power calculator, an example household rather than a client. They owe $928,000 at 6.48% and have $50,000 a year they don’t need. In year one they pay $50,000 off the home loan, the lender splits it out as a separate $50,000 investment loan, and they redraw that into income-producing shares or funds.

They still owe $928,000. Now $878,000 is home loan and $50,000 is investment debt. At 6.48% that investment loan costs about $3,240 in interest in its first full year, and at their 39% marginal rate the deduction is worth roughly $1,264. That refund, plus whatever the investments pay out, goes back onto the home loan next year.

A hypothetical: ten years of it

Run the same loop every year for a decade, recycling the refunds too, and our debt recycling calculator puts their deductible debt at about $560,869 and the home loan at $367,131. Over those ten years the deductions are worth about $75,043 in tax. On the same settings, the Hornsby first home buyers recycling $20,000 a year at 32% get about $24,289, and the Turramurra family recycling $100,000 a year at 47% get about $183,786.

The tax value scales with the cash you can spare each year and with your marginal tax rate. That’s why this suits high earners with big loans far more than first home buyers.

The comparison that matters

Recycling isn’t competing with doing nothing. It’s competing with paying the loan down faster, staying in the same hypothetical, which is a guaranteed, tax-free return at your loan rate. If the Chatswood couple put the same $50,000 a year against the mortgage, the calculator’s offset arithmetic says they’d save about $817,130 of interest and be debt-free roughly eleven and a half years sooner. The investments have to beat that.

Holding the money in an offset instead gets the same saving and keeps it within reach. For a household that wants flexibility more than a deduction, that’s usually the better first step, and the two can be combined later once the buffer is built.

To beat it, the portfolio has to return more than the loan rate over time. Investment income is taxed, gains will be taxed under new rules, and the deduction only gives back part of the interest, never all of it, however high your tax rate. Ansa thinks, and some financial planners will disagree, that most households who try this would have done just as well paying the loan down, and the ones who do better are the ones who’d have stayed invested through a crash anyway.

How the split works

Your lender divides the mortgage into portions: one stays your home loan, another becomes a separate facility you draw only for investing. That separation matters because the ATO requires interest to be apportioned where one loan funds both private and investment purposes. Untangling a mixed account years later costs your accountant hours and you the deduction. Keep them apart from day one.

The offset catches people out. Money sitting in an offset account is still your savings, not a loan, so investing straight out of the offset creates no deductible debt at all. The cash has to go onto the home loan first and come back out as a new borrowing through the investment split, and that order is what makes the interest deductible.

Lenders aren’t equally good at this. Some limit how many splits a loan can have, some charge to add one, and redraw into a separate facility can take days at one bank and minutes at another. The lender we’d pick for a recycling client is often not the one we’d pick for the same household without the strategy, because the cheapest rate on a loan that can’t be split cleanly isn’t cheap. Ask before you sign.

The 2027 tax change

From 1 July 2027, the 50% discount on capital gains is replaced by cost base indexation and a 30% minimum tax for gains made from that date by individuals, trusts and partnerships. Recycling has always leaned on growth assets held for years, taxed lightly when sold. Under the new rules the growth after the changeover is taxed differently, and for many investors more heavily. Shares bought with recycled money in 2028 and sold a decade later would have their whole gain taxed the new way. Old projections that assumed the discount on every dollar of gain need rerunning, and your accountant is the one to rerun them.

The risks

You’re borrowing to invest. If the investments fall, you still owe every dollar, and the interest keeps coming while you wait. If the market drops by a fifth, the portfolio shrinks with it and the investment loan doesn’t move at all. That loss is yours.

Mixing private spending into the investment split, even once, muddies the deduction. Rate rises hit both halves at the same time, so the home loan and the investment loan both cost more while the portfolio may be doing nothing. And investing a large redraw in one go just before a downturn hurts far more than feeding the same money in over a year or two, which is why the people who do this well tend to recycle on a schedule rather than in lumps.

Who it suits, and what we won’t do

It suits a household with steady surplus income, months of buffer rather than weeks, a long horizon, and an accountant involved before the split is set up. The Hornsby couple, in our hypothetical, aren’t there yet. With a 90% loan and mortgage insurance behind them, the first dollars of spare cash are better spent getting the loan under 80%, and the $24,289 of tax value isn’t worth borrowing to invest on top of a loan that size. Later, maybe. Not now.

If your income is lumpy, your buffer is thin or the loan only just services, we’ll tell you not to do it yet, and we have declined to set it up for people in that position. Our part is the loan structure: the splits, clean facilities and statements your accountant can follow. Choosing the investments and the tax advice are theirs, and nothing here is a recommendation to borrow and invest.

Our opinion: debt recycling is a discipline strategy that got sold as a hack. Run for ten years on money you don’t need for anything else, with clean structure, it’s one of the few places the tax system works in an owner’s favour. Run for two years and abandoned, it’s just a bigger loan, which is how it often ends. The investment lending page covers how we set it up, and the borrowing power calculator shows whether the numbers open the door at all.

Tax mechanics on this page are general information only. Your accountant decides deductibility for your circumstances, and we’re happy to talk to them before anything is signed. That call is free.