Most Australians focus on one thing when it comes to their finances: paying off the mortgage. But what if you could reduce your home loan debt and grow your wealth at the same time?
That’s exactly what debt recycling aims to do.
It’s a long-term strategy that can help homeowners turn their mortgage into a tool for building a future—and if done right, it can significantly improve your financial position over time.
What Is Debt Recycling?
Debt recycling is a strategy where you gradually convert your non-deductible home loan (bad debt) into tax-deductible investment debt (good debt). This is done by paying down your mortgage and then borrowing the same amount again to invest.
It’s a rinse-and-repeat approach that allows you to:
- Lower your home loan
- Borrow funds (e.g. via redraw or a line of credit)
- Invest those funds into income-producing assets (like shares)
- Use the investment income to help cover loan interest and reduce your mortgage faster
Over time, you’re replacing mortgage debt with investment debt—and potentially building a portfolio while you’re at it.
How Does It Build Wealth?
Here’s why it can work so well:
- Home loan interest is not tax-deductible, but investment loan interest usually is
- Investments can grow over time and generate income (like dividends)
- That income can be used to reduce your home loan faster
- As your equity grows, you can recycle more debt into investments
Let’s look at a simplified example:
Emma owes $400,000 on her home. She makes an extra $20,000 repayment, then redraws that amount and invests it in ETFs. She does this annually for 5 years, gradually growing a diversified investment portfolio—while reducing her home loan and gaining tax advantages along the way.
Who Is Debt Recycling Right For?
Debt recycling isn’t a one-size-fits-all solution, but it can work well for:
- Homeowners with decent equity and a stable income
- Those with good financial discipline
- People looking for long-term wealth-building strategies
- Those who are comfortable with some investment risk
It may not be suitable for:
- First-home buyers or people with low equity
- Anyone uncomfortable with managing debt or market volatility
- Households with unstable income or cash flow issues
What Are the Risks?
Debt recycling isn’t without downsides. It involves both debt and investing, so it’s important to be aware of the risks:
- Market risk: Your investments could lose value
- Interest rate risk: Loan repayments may increase
- Security risk: Your home is still the underlying asset
- Discipline risk: Borrowed funds must only be used for investing—not lifestyle expenses
Debt recycling should never be attempted without a clear plan and professional advice.
Are There Tax Benefits?
Yes—done correctly, the strategy offers tax advantages:
- Investment loan interest is usually tax-deductible
- The income from your investments (like dividends) may be taxed—but can be offset by the deductible interest
- The goal is to create a more tax-efficient use of your debt while still focusing on paying off your home
However, it’s critical to structure your loans correctly. Mixing deductible and non-deductible debt in the same facility can create complications with the ATO.
How to Start Debt Recycling
If you’re ready to explore debt recycling, here’s how to start:
- Speak to a licensed financial advisor who understands the strategy
- Review your current mortgage setup (e.g. redraw, offset, or split loan structure)
- Determine your risk tolerance, cash flow, and investment preferences
- Create a personalised plan
- Set up protections like life and income insurance to manage risks
Pro tip: Keep investment loans separate from your home loan to avoid compliance issues.
Why Local Advice Matters
Debt recycling is complex and needs to be tailored to your situation. Working with a local financial advisor in Cairns means you’re getting insights based on:
- Local property and economic conditions
- Your personal goals and financial stage
- A deep understanding of Australian tax law and lending regulations
At Freedom Planning, we work with clients to help structure debt recycling plans that are sustainable, compliant, and focused on long-term outcomes.
Final Thoughts
Debt recycling isn’t about taking on more debt—it’s about using debt more effectively.
If you’re a disciplined borrower with a long-term mindset, this strategy can help you pay off your mortgage faster, grow your investments, and create a more tax-efficient future.
But it’s not a DIY move. Getting it right means getting advice.