Is Debt Recycling Worth It?
Nick Donato is a financial adviser at Guidance Financial Services who specialises in helping clients all over Australia aged 30 to 50 get their financial foundations sorted, so they can build wealth and have more choice in life through our Wealth Builder program. You can learn more about it here.
You pay the mortgage on time, maybe a bit extra. The offset balance keeps growing.
And at some point a question comes up. Is putting every spare dollar on the home loan the only option?
Debt recycling is a strategy that gradually replaces non-deductible home loan debt with debt that's used to invest, where the interest may be tax-deductible. Whether it's worth it comes down to the overall result after tax: investment returns against interest costs, fees and the risk of loss. The tax deduction helps, but it rarely decides it on its own. Cash flow, time frame, comfort with risk and getting the loan structure right all matter just as much, so it's a strategy to explore with personal advice rather than act on from a blog.
This post is based on an episode of the Wealth Builder Podcast, where I spoke with mortgage broker Aydin Gulmen. You can listen below:
How does debt recycling work?
It's a way to build investments without having to choose between that and paying down the mortgage.
Here's the basic idea. Say you've got $200,000 sitting in your offset. That money pays down the home loan. Then the same amount is borrowed back through a separate loan split and invested, for example in shares or ETFs.
Your total debt stays the same. What changes is the purpose of some of it.
In Australia, whether interest is deductible generally depends on what the borrowed money is used for, not what the loan is secured against. Interest on money borrowed to buy income-producing investments may be deductible. Interest on your home loan isn't.
Over time, investment income and any tax refunds go back onto the home loan, and the cycle repeats.
As Aydin put it in the episode, debt recycling isn't about borrowing more. It's about changing the job your existing debt is doing.
How much difference does your tax rate make?
Quite a lot. A deduction is worth your marginal tax rate, so the same interest bill costs less after tax the higher your tax rate is.
Here's what $10,000 of deductible interest looks like at each rate. The figures use the ATO's 2026-27 resident tax rates plus the 2% Medicare levy:
Taxable income Marginal rate incl. Medicare levy Tax saved After-tax cost of the interest $45,001 - $135,000 32% $3,200 $6,800 $135,001 - $190,000 39% $3,900 $6,100 $190,001 and over 47% $4,700 $5,300
Source: ATO, Tax rates - Australian residents. Illustration only. Your actual tax position depends on your full circumstances.
Same loan, same strategy, a $1,500 difference in after-tax cost between the middle bracket and the top one.
So your tax rate is one piece of the puzzle. It's an important piece, but as the next section shows, it's not the whole picture.
Is the tax deduction enough to make debt recycling worth it?
No. And this is the part that tends to get lost.
A deduction reduces the cost of the interest. It doesn't cover it. Even at 47%, our $10,000 interest bill still costs $5,300 out of your pocket. You still owe the loan, whatever happens to the investments.
So the real test isn't "do I get a tax deduction?" It's whether your after-tax investment returns are likely to beat the after-tax cost of borrowing, once loan fees, investment fees and transaction costs are counted too.
If they do, debt recycling may add to your wealth over time. If they don't, you could end up worse off than if you had just paid down the mortgage.
And borrowing to invest works in both directions. It magnifies gains, and it magnifies losses. If markets fall, the loan stays the same size. The investment split is also generally secured against your home.
That's why debt recycling is usually considered a long-term strategy, often over seven years or more.
FREE DEBT RECYCLING FACT SHEETThinking about debt recycling? Get across what's involved before you take the next step.
Our free fact sheet walks through how the strategy works, with a worked mortgage example, the main risks and the loan structure points to get right.
What's the most common mistake that can cost you the deduction?
Mixing personal and investment money in the same loan account. Aydin called it loan contamination, and he says it's where people get caught out fastest.
His example went like this. Someone has a $50,000 investment loan split. A $2,000 dividend gets paid into it. A week later, $1,500 comes out of the same account for a family holiday.
That account now mixes borrowing for investment with borrowing for personal spending. If money is ever redrawn from it, it's no longer clear how much relates to the investment and how much to the holiday. Where the purpose of the borrowing can't be clearly shown, the deduction can be reduced or disallowed.
That's why the investment split is generally kept for investment transactions only, completely separate from day one. It's also why the choice between offset and redraw matters more than it first looks. We covered that in our Offset vs Redraw episode and you can visit the blog here.
Getting the structure right involves your adviser, your broker and your tax agent working together. It isn't something to piece together yourself.
What decides whether debt recycling is worth it for you?
Three things, more than anything else.
Your financial position. The strategy assumes stable, reliable income to keep up repayments on the home loan and the investment split. It's worth asking: could you still meet the repayments if interest rates rose and your investments fell at the same time?
Your time frame. Debt recycling needs years to work. Someone who needs the money in the next one to three years generally isn't a good fit.
Your tolerance for risk. You'd be investing borrowed money in growth assets. Market falls will happen along the way. The question is whether you could sit through them without being forced to sell.
The strategy also takes discipline. Investment income and tax refunds need to go back onto the home loan, not get spent. As Aydin said in the episode, without that you've simply taken on investment debt without the debt reduction that makes it worthwhile.
It's generally not a starting point. If you've just bought your first home, your cash flow is tight or you're new to investing, the foundations usually come first.
Before you consider debt recycling, what's worth knowing?
A few questions to think about:
Is your income stable enough to carry the repayments through a rough patch?
Do you have an emergency buffer that sits outside the strategy?
Are you comfortable seeing a borrowed investment fall in value?
Will you realistically redirect the income and refunds, year after year?
Does your current lender let you set up separate loan splits?
If most of those got a yes, debt recycling could be worth a closer look. If a few gave you pause, that's useful to know too.
Either way, the answer depends on your whole financial picture: your mortgage, your cash flow, your other goals and the tax position. That's what personal advice is for.
Want to know if debt recycling is right for you?
Whether debt recycling is worth it depends on your whole financial picture: your mortgage, cash flow, goals and tax position.
In an appointment with Guidance Financial Services, we’ll look at your actual numbers and give you a straight answer on whether it’s worth pursuing, or whether something else should come first. Sometimes the answer is “not yet”, and that’s worth knowing before you restructure your home loan.
If it does fit, we’ll work alongside your mortgage broker and tax agent so the structure is set up properly from day one.
Does debt recycling mean taking on more debt?
Not necessarily. Debt recycling generally keeps total borrowing the same and changes what part of it is used for. Money that paid down the home loan is borrowed back to invest. What does change is risk: part of the debt is now invested in assets that can fall in value, and the investment debt can stay around after the home loan is gone.
Is debt recycling legal in Australia?
Generally yes, where borrowed money is genuinely used to buy income-producing investments and the records clearly show it. Deductibility depends on how the loans are set up, used and kept separate. Arrangements entered into mainly for a tax benefit can attract ATO attention, which is one reason to set the strategy up with a registered tax agent.
Is debt recycling worth it on a middle income?
It can be, but the tax benefit is smaller. At a 32% marginal rate including the Medicare levy, $10,000 of deductible interest still costs $6,800 after tax, compared with $5,300 at 47%. The lower the tax rate, the more the strategy relies on investment returns to come out ahead.
Can you use debt recycling to buy an investment property?
Yes. The borrowed money can be used for any income-producing investment, including property, shares or managed funds. Property usually involves larger amounts, higher entry costs and less flexibility to sell in parts, which changes the risk and cash flow picture.
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This article is for educational purposes only and does not take into account your individual circumstances. If you would like tailored advice, we can help you work through the numbers properly.
