Recently, Pearler partnered with Natasha Etschmann (better known as Tash Invests and Tash Lends ) and mortgage broker Rohit Bajracharya to run a webinar unpacking one of Australia's most talked-about wealth-building strategies: debt recycling.
If you've ever been curious about debt recycling but found yourself lost in jargon, this guide is for you.
Debt recycling is one of those financial concepts that sounds far more complicated than it actually is.
For some Australians, it may be a way to gradually convert some home loan debt into investment-related debt. For others, it might be a strategy they've heard mentioned online but never quite understood.
Either way, there's usually one big question:
What actually is debt recycling, and how does it work?
Let's break it down.
What is debt recycling?
Debt recycling is a loan structuring strategy that may allow some homeowners to gradually convert non-tax-deductible home loan debt into debt that may become tax deductible.
The basic idea looks something like this:
- Extra money is paid into a home loan.
- A separate loan split is created.
- Funds are reborrowed from that split and invested.
- Because the borrowed money may now be used for investment purposes, the interest on that portion of the loan may be treated differently for tax purposes.
The goal isn't necessarily to create more debt (in most cases, it would be the same amount of debt)..
Instead, it's to change the purpose of existing debt.
Why do people consider debt recycling?
For many homeowners, their largest debt is their home loan.
Unlike some investment-related borrowing, interest on a home loan used to buy your principal place of residence is generally not tax deductible.
Debt recycling is one approach that may allow a portion of that debt to be linked to investments instead.
Depending on individual circumstances, this may create tax deductions that wouldn't otherwise exist.
Of course, tax outcomes depend on personal circumstances and current tax law, so it's important to seek professional advice before implementing any strategy.
A simple example
Imagine someone has:
- A $600,000 home loan
- $50,000 in cash savings
Rather than investing the $50,000 directly, they may:
- Use the $50,000 to reduce their home loan balance.
- Create a separate loan split for $50,000.
- Reborrow that amount.
- Invest those funds.
The end result may be:
- A smaller portion of non-deductible home loan debt
- A separate investment-related loan
- Investments purchased with borrowed funds
The exact structure will vary depending on the lender and individual circumstances.
Do you need cash savings to start?
Not always.
Some people begin debt recycling using available cash savings or money in their offset.
Others may have significant equity in their property but limited savings.
In some situations, equity may be used as part of the strategy.
However, this typically depends on factors such as:
- Borrowing capacity
- Loan-to-value ratio (LVR)
- Lender policies
- Overall financial position
This is where speaking with a mortgage broker may help clarify what's actually possible.
Do you need a separate loan split?
Generally, many debt recycling strategies rely on separate loan splits.
Why?
Because clear record keeping matters.
If personal spending, home loan debt and investment borrowing all become mixed together, it may become difficult to determine which portion of interest relates to which purpose.
A separate split may help create a cleaner paper trail.
Many accountants prefer this because it may simplify record keeping and tax reporting. Plus it’s easier to relay to the ATO in case there are any concerns.
Can you debt recycle gradually?
Potentially.
A common misconception is that debt recycling only works if someone has a large lump sum available.
In reality, some people may choose to build savings over time before implementing a strategy.
Others may structure things differently depending on lender requirements and minimum split amounts.
The practical approach often depends on:
- Available cash
- Administrative complexity
- Lender policies
- Professional advice
Sometimes keeping things simple may be more important than trying to optimise every dollar.
What investments can be used?
This is one of the most important questions — and one of the hardest to answer generally.
Many people use debt recycling alongside investments that may generate assessable income, such as shares or ETFs.
However, the tax treatment of any investment depends on the investment itself and individual circumstances.
Questions that commonly arise include:
- Do dividends matter?
- What about low-dividend investments?
- What about growth-focused shares?
- What if the investment pays distributions instead?
These are usually questions best answered by an accountant or licensed financial adviser. Although, generally speaking, the assets or investments must have a demonstrable expectation of generating assessable income.
Can you use investments you already own?
In many cases, debt recycling focuses on how borrowed funds are used at the time the investment is acquired.
That means investments purchased previously may not simply be "converted" into a debt recycling structure later.
Depending on the circumstances, restructuring may be possible, but it could involve costs, complexity and tax considerations.
Professional advice is particularly important in these situations.
What are the risks?
Debt recycling is often discussed in terms of tax benefits, but it's equally important to understand the risks.
Investment risk
Investments may rise or fall in value.
A portfolio purchased through a debt recycling strategy is still exposed to market movements.
Interest rate risk
Higher interest rates may increase borrowing costs.
Cash flow risk
Loan repayments still need to be met regardless of investment performance.
Complexity risk
Debt recycling involves lending, investing and taxation.
Mistakes may be costly to unwind.
Record-keeping risk
Poor documentation or mixed-purpose loans may create administrative headaches later.
Is debt recycling still worth considering when interest rates are higher?
Higher interest rates generally increase the cost of borrowing.
That doesn't automatically make debt recycling unsuitable, but it may change the numbers.
The potential benefits and costs will vary depending on:
- Interest rates
- Investment returns
- Tax position
- Time horizon
- Risk tolerance
This is one reason debt recycling is often viewed as a long-term strategy rather than a short-term tactic, as there are many considerations and moving parts.
What about couples, trusts and other ownership structures?
This is where debt recycling can become significantly more complex.
Questions often arise around:
- Joint home loans
- Different income levels between partners
- Trust ownership
- Company structures
- Superannuation
The answers may differ depending on the specific structure involved.
If debt recycling intersects with trusts, companies or complex ownership arrangements, professional advice is usually essential.
What happens if the bank gets it wrong?
It happens more often than people might expect.
Loan splits may occasionally be structured incorrectly, funds may end up in the wrong account, or loan purposes may become mixed.
The good news is that problems may often be fixed.
The less-good news is that fixing them may involve time, paperwork and professional assistance.
That's why many people choose to involve both a broker and an accountant before implementing a strategy.
The key takeaway
Debt recycling isn't a shortcut to wealth, and it isn't appropriate for everyone.
It's simply a loan structuring strategy that may help some homeowners invest while changing the nature of part of their debt.
Like any strategy involving borrowing and investing, it comes with potential benefits, risks and trade-offs.
The most important step isn't choosing the perfect ETF or calculating the ideal split size.
It's understanding how the structure works before making any decisions.
Because when it comes to debt recycling , getting the structure right may matter just as much as the strategy itself.
