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    Debt Recycling

    Convert non-deductible home loan debt into tax-deductible investment debt

    What is Debt Recycling?

    Debt recycling is a strategy for homeowners to accelerate mortgage repayment and build an investment portfolio simultaneously. You make extra repayments on your home loan, then immediately redraw that amount to invest in income-producing assets (shares, ETFs, or property). The redrawn amount becomes investment debt, and interest on it is tax-deductible.

    How it works

    1. 1Make extra repayments on your home loan (principal reductions)
    2. 2Immediately redraw the same amount to invest in income-producing assets
    3. 3Investment income (dividends, rent) is used to make further extra repayments
    4. 4Repeat: more extra repayments → more redraws → more investments → more income
    5. 5Over time, non-deductible home loan debt is replaced with deductible investment debt
    6. 6When home is paid off, entire debt is investment debt, tax-deductible interest

    Worked example

    Home loan: $600,000. Extra repayment: $2,000 a month.
Each month: pay $2,000 off the home loan, then borrow $2,000 back on a separate investment split and invest it.
Over time the non-deductible home loan falls and a deductible investment debt funds the portfolio.
The outcome depends on investment returns, which can be negative, and on keeping the loan purposes separate.

    Pros

    • Converts non-deductible debt (home loan) to deductible investment debt over time
    • Tax refunds from investment interest deductions accelerate the whole strategy
    • Builds wealth in two ways simultaneously: pays down home + grows investment portfolio
    • Particularly powerful for high income earners (37–47% marginal rate)

    Cons

    • Requires a redraw facility (NOT an offset account), critical distinction
    • Complex record-keeping required to satisfy ATO "purpose test" for deductibility
    • Investment assets must produce assessable income, can't use for growth-only assets
    • Requires financial discipline over many years to execute correctly

    Risks

    • Investment asset values can fall. You may owe more than the investment is worth
    • ATO scrutiny: must maintain clean paper trail proving each borrowed amount was used for investment
    • Interest rate rises increase cost of the strategy and may make it cashflow-negative
    • Do not mix personal and investment borrowings in the same account, destroys deductibility

    Tax treatment

    Purpose test: interest is deductible if the redrawn funds are used to purchase income-producing assets (ATO TR 2000/2). Each redraw must be clearly documented with a separate loan account if possible. Investment income (dividends, rent) is assessable. Franking credits from Australian shares enhance effective return. CGT applies on asset sale. Seek specialist advice. This strategy requires precise implementation.

    Official references

    Keep exploring

    Read property guides on the blog All strategies

    General Advice Warning

    The information on this site is general in nature and does not consider your personal circumstances, financial situation, or needs. Before acting on any information, you should consider its appropriateness having regard to your own situation and seek professional advice from a licensed financial adviser, mortgage broker, accountant, or solicitor.