Debt Recycling Explained
What is debt recycling, and how does it work in Australia?
By Andrew, franklenn FINANCE 8 min readUpdated 3 November 2026
The short answer
Debt recycling is a strategy where you pay down your home loan, then borrow that same amount back through a separate loan split and invest it in income-producing assets such as shares or property. Your total debt stays about the same, but part of it changes from non-deductible home debt to investment debt, whose interest may be tax deductible. It can help some homeowners build wealth faster, but it adds investment risk and must be set up carefully with your accountant or financial adviser.
Detailed explanation
The basic idea
Interest on your home loan generally isn't tax deductible, because the money was used to buy a home you live in. Interest on money borrowed to invest in income-producing assets generally can be. Debt recycling tries to gradually swap the first kind of debt for the second kind.
You make a lump sum or regular payment off your home loan, then redraw or borrow that amount through a separate split and invest it. Over time, as you repeat the process, more of your debt becomes investment debt and your home debt shrinks.
The appeal is that your overall debt doesn't grow, yet you're building an investment portfolio alongside your home and potentially reducing the after-tax cost of your borrowing. Over many years, some people find their non-deductible home debt is gone sooner than it would otherwise have been, while their investments have grown.
How it is usually set up
The structure is the critical part. The investment borrowing needs to be in its own loan split, used only for investment purposes, so the purpose of the borrowing is clear. Redrawing from a single loan that also holds personal debt creates a mixed-purpose loan, which can make the interest difficult or impossible to apportion for tax.
- Split the home loan into a home portion and an investment portion.
- Pay down the home portion with savings, bonuses or investment income.
- Increase the investment split by the same amount and invest the funds directly.
- Keep the investment money moving straight from the loan into the investment.
- Repeat on a schedule that suits your cash flow.
Who it might suit
Debt recycling tends to suit people who have stable income, meaningful equity in their home, a long time horizon, and are comfortable with investment markets going up and down. It is less suitable if your job is uncertain, you have little equity, or you would be stressed by your investments falling in value while the debt remains.
It also helps to have your other finances in order first. If you're carrying credit card debt, have no emergency savings or are expecting a big change such as a new baby or a career break, it's usually wiser to sort those out before adding investment borrowing to the mix.
The risks to weigh up
You are borrowing to invest, which magnifies both gains and losses. If the investments fall in value, you still owe the full amount. Interest rates can rise, and dividends or rent are not guaranteed. Tax rules, and how the ATO views particular arrangements, matter a great deal.
We are mortgage brokers, so our role is to set up the loan structure properly. Whether debt recycling is right for you, and what to invest in, is a question for a licensed financial adviser and your accountant. We are happy to work alongside them.
There are practical traps too. If you redraw money and it sits in an everyday account for a while, or part of it is spent on something personal, the purpose of that borrowing becomes muddied. Good record-keeping, and a clear trail showing the money went from the loan straight into the investment, is important.
Worked example
Recycling $48,000 of home loan debt
An illustrative example. A homeowner has a $520,000 home loan at 6.04% p.a. and $48,000 of savings. They pay the $48,000 off the home loan, then draw $48,000 through a separate investment split at the same rate and invest it in a diversified share portfolio. For illustration, their marginal tax rate is 39% including the Medicare levy.
| Home loan before | $520,000 (all non-deductible) |
| Home loan split after | $472,000 |
| Investment split after | $48,000 |
| Total debt | $520,000 (unchanged) |
| Annual interest on investment split at 6.04% | $2,899.20 |
| Potential tax saving at 39% if deductible | $1,130.69 a year |
Their debt hasn't changed, but $48,000 of it may now be deductible, potentially reducing tax by about $1,131 a year. Any dividends are taxable income, and the share portfolio can rise or fall. This is a simplified illustration, not tax advice; speak to your accountant or adviser.
Illustrative only. Figures are examples, not a quote or a recommendation.
Common mistakes
- Redrawing from a mixed loan instead of a separate investment split.
- Using the borrowed funds for anything other than the intended investment, even briefly.
- Investing without advice or without understanding the risks of borrowing to invest.
- Ignoring that dividends and rent are taxable income.
- Draining savings to start the strategy and leaving no emergency buffer.
Frequently asked questions
Next steps
Talk to franklenn FINANCE
If you and your adviser are considering debt recycling, book a free discovery call with franklenn FINANCE and we'll help set up a clean loan structure to support it.
This guide is general information only and does not consider your objectives, financial situation or needs. It is not financial, tax or legal advice. Lender policies, rates and government schemes change. Please speak with us, and with your accountant or solicitor where relevant, before acting.