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Debt Recycling

Want to pay down your mortgage faster and build your wealth to create passive income?

The answer is a strategy called debt recycling.

Debt recycling is when you turn non-deductible debt like your home loan into tax-deductible debt that you can claim against your personal income and reduce your overall tax liability.

Traditionally, people wait until their home loan is repaid before they start investing. Unfortunately, due to the growing size of home loans, most people start investing way too late in life. Debt recycling allows you to invest immediately rather than waiting for the mortgage to be paid off.

Seeking tailored professional advice on this valuable strategy is beneficial to those who wish to pay off their debt faster.

The following information on debt recycling provides a general guide to how the process works, who it may benefit and the risks involved.

How does Debt Recycling work?

This strategy involves transferring your non-deductible debt of a home loan into a tax deductible debt of an investment loan. The primary objective is to reduce the non-deductible debt faster than just making regular repayments, while accumulating wealth.

All surplus cash flow, after the interest is paid on the investment loan (line of credit), is used to reduce a non-deductible home loan, thereby more rapidly increasing equity in the home. Home loan repayments are ‘Principal and Interest’ while the investment loan payments are usually ‘Interest Only’ to ensure that non-deductible debt repays earlier and deductible debt works to the maximum. All investment earnings, franking credits, tax refunds and other surplus cash flow, after paying the investment loan interest, should be used to further reduce the home loan and increase equity in the home.

Over time, amounts equivalent to the increase in equity can be drawn down and invested in growth investments further, if desired (depending on your life stage and objectives). If the above process is repeated over future years in a disciplined manner it can reduce the non-deductible home loan more rapidly, whilst increasing investments into growth assets.

A loan facility allowing separate sub-accounts is preferred, with the ability to choose between principal and interest and interest only repayments. As some of the investment debt will have deductible interest costs, these amounts should be kept separate.

How can Debt Recycling benefit you?


Faster Debt Repayment and Increased Investments

By consistently following the disciplined process of debt recycling over many years, you can speed up the repayment of your non-deductible home loan while simultaneously growing your investments that have the potential for growth and will fund your retirement.


Immediate Investment Opportunity

Unlike waiting for your mortgage to be completely paid off, debt recycling allows you to start investing right away. This immediate action can have positive effects on your overall financial growth as your asset base will set you free.


Power of Compounding Earnings and Dollar-Cost Averaging

Debt recycling taps into the power of compounding earnings early on. This means your investment earnings generate more earnings over time. Additionally, it involves a strategy known as dollar-cost averaging, where you consistently invest the same amount at regular intervals, smoothing out the impact of market fluctuations.


Higher Returns During Low-Interest Periods

When interest rates are low, returns from investments in shares or property typically outperform the benefits of simply paying off debt. By directing your income into your home loan while interest rates are low, you have the opportunity to reduce your debt faster and save on interest costs.


Tax Effectiveness

Borrowing to invest can be tax-effective, particularly through the deductibility of interest. This means the interest you pay on the borrowed funds is deductible, reducing the overall cost of the investment strategy. The higher your marginal tax rate, the more advantageous this strategy becomes.


Diversified Approach to Wealth Creation

Utilising gearing (borrowing to invest) provides a diversified approach to building wealth for your retirement. Debt recycling allows you to spread your investments across different assets, reducing risk and potentially enhancing returns over the long term.

Risks of Debt Recycling

While debt recycling has many benefits, there are a few downsides worth considering – especially if your loans are not correctly structured, or you don’t have the required income to support the endeavour over the long term.

Market downturns

Just as your returns are compounded when debt recycling, so are any losses you might suffer when markets experience a downturn.

Long-term strategy

We only recommend debt recycling as a long-term strategy. This allows you time to recover from any market crashes before you access income from your assets. Debt recycling is usually not recommended for anyone with an investment time frame of fewer than seven years, as a longer timeframe will generally lead to greater benefits.

Strong and secure household income

Debt recycling is not effective for those without a strong household secure income who cannot comfortably service both loans. Clients who can save more than $3,000 per month are best suited to implement this strategy, and will benefit the most from the tax advantages.

Adequate Insurance

Not having enough insurance to protect your income and cover loan repayments in the event of your death or disability can leave you open to risk and leave you vulnerable to unexpected losses when debt recycling.

Still Unsure About Debt Recycling? We Can Help

If you’re unsure whether debt recycling is the right strategy to help you build your wealth and secure a brighter financial future, reach out to our team of qualified financial advisors at Delta Financial Group today.


What exactly is debt recycling and how does it work?

Debt recycling involves using investment loans to pay off non-deductible debt (like a mortgage) while simultaneously investing in income-producing assets, aiming to increase wealth and tax efficiency.

Is debt recycling suitable for everyone, or are there specific criteria?

Debt recycling is suitable for individuals with stable incomes, a high-risk tolerance, and a long-term investment horizon. It requires discipline and careful planning.

What are the potential risks involved in debt recycling?

Risks include fluctuations in investment returns, interest rate changes affecting loan costs, and the potential for investment losses impacting debt repayment.

Can debt recycling help in reducing mortgage interest costs effectively?

Yes, by redirecting non-deductible debt into deductible investment loans, individuals can potentially reduce overall interest costs over time.

Are there tax implications associated with debt recycling strategies?

Tax implications exist as interest on investment loans used for debt recycling is often tax-deductible, potentially reducing taxable income.

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