Debt Recycling: How I Set It Up, Why It Makes Sense, and What to Watch Out For

This is general information, not personal advice. Please speak to a licensed financial adviser and registered tax professional before making decisions.

When I first heard the term 'debt recycling,' I assumed it was some advanced finance trick for people with spreadsheets for everything. But over time, I spoke to friends who’d done it, listened to a couple of podcasts that explained the steps clearly, and started to see how it could work for us.

Earlier this year, my partner and I set it up ourselves. We didn’t increase our total debt. We just created loan splits and used one of them to invest in ETFs we already wanted to buy. It wasn’t complicated, but it did take some planning.

Here’s how it works, why some Aussies use it to make their money go further, what to avoid, and how to figure out if it’s worth considering for your situation.

But before we get into it, just remember, I am sharing my own experience. It's worth reaching out to financial professionals before deciding if it's right for you (which is what I did as well!).

What is debt recycling?

Debt recycling is a way to turn part of your home loan, which normally isn’t tax deductible, into investment debt that potentially is. The idea isn’t to borrow more. It’s about reshaping the debt you already have.

Here’s the basic process:

• You build up cash in your offset account.
• You use that cash to pay down a portion of your homeloan
• Then you borrow a new investment loan (also referred to as a split loan).
• You then redraw the money in your new investment loan and invest it in income-producing assets like shares, ETFs, or property.

Your overall debt stays the same. But now a portion of your home loan is linked to investments. That means the interest on that part of your loan might become tax deductible.

This is very different from gearing or leveraging, where you take on new debt to invest. With debt recycling, you’re just changing the purpose of your existing loan and documenting it properly.

The tax benefit, in plain English

Let’s say you have a $100,000 home loan and your interest rate is 4%. That means you’re paying $4,000 in interest each year.

If you create a split loan and debt recycle that $100,000 for investing instead, that $4,000 may become a tax deduction.

Now let’s say your marginal tax rate is 30%. That deduction would reduce your tax by $1,200, which means the real cost of that interest drops to $2,800. That’s an effective interest rate of 2.8%.

Here’s the formula many people use to estimate the after-tax cost:

Interest rate × (1 − marginal tax rate percentage)

So if your loan rate is 6% and your marginal tax rate (including the Medicare levy) is 32%, your effective interest rate would be 6% × 0.68 = 4.08%.

This tax benefit doesn’t make bad investments good. But it can make good long-term investing a little more efficient.

Offset or debt recycling? It depends

A lot of people ask if they should keep spare cash in their offset or use it to debt recycle. That question actually contains two separate decisions.

1. Should you invest?
Taking money out of your offset means your mortgage interest goes up. That’s similar to borrowing to invest, so it comes down to whether you’re comfortable taking on investment risk. Your risk tolerance, time horizon, and cash flow matter here.

2. If you are investing, should you debt recycle?
If you’re going to invest anyway, the question becomes whether you want to structure it through a loan split to make the interest potentially deductible. For many people, the answer is yes, as long as it’s done properly.

Remember, your offset gives you a guaranteed return equal to your mortgage rate. Investing gives you a chance at higher returns, but also more ups and downs (and of course, risk). You need to know your risk profile and make the choice that fits your comfort level.

How I set it up

We waited until we had a solid emergency buffer in our offset before setting anything up. Once we were ready, here’s an example of how we approached it (numbers below are for illustration only):

1. We engaged a broker

   We started by speaking with a mortgage broker, who worked with the bank on our behalf to figure out how to best split our home loan and confirm our borrowing capacity.

   Since our income had changed since we first bought our home, we needed to be reapproved by the bank. Once everything was confirmed, we signed the paperwork and were ready to go
   

2. Paid down the home loan
   We had around $50,000 saved in our offset account (alongside our emergency fund) and decided to recycle that amount.

   We paid the $50,000 directly into our home loan, which reduced our non-deductible debt — an important first step before setting up the investment split.
   

3. Split the loan
   With help from our broker, the bank created a new $50,000 split loan. This became a separate investment loan, completely distinct from our main home loan.
   
4. 
   Transfered and invested
   We then transferred the full amount from the new investment loan straight into a clean brokerage account with Pearler - keeping it completely separate from any existing accounts. From there, we invested in two ETFs we’d already researched and felt confident about.
   
5. 
   Turned off DRP
   We chose to turn off dividend reinvestment (DRP) so that any distributions would land in cash. This makes it easier to fund future debt recycling cycles and track our money more easily.
   
6. 
   Tracked everything
   We logged every detail - which ETFs we bought, the number of units, and their purchase prices - in a simple spreadsheet.

We plan to repeat this process with new splits as we build our offset back up over time. It’s a structured, repeatable way to steadily grow our investments while paying down the home loan

What to avoid (and how to stay on track)

Debt recycling works best when things are kept neat. Here are some common mistakes, and how to avoid them.

Mixed loans
Don’t use a single loan split for both personal spending and investments. That can mess up the deductibility and make accounting challenging. It's preferable to keep the split seperate.

Broken tracking
If you move your loan funds into a general account with your salary or other money, it’s hard to prove what the funds were used for. It's best to send investment funds directly to your investment account for easier tracking.
Assets with no income
To claim interest as a deduction, the investment needs to produce or aim to produce income. If you invest in something that doesn’t, the deduction may not apply.

Poor record keeping
If you sell part of your investment, the related portion of the loan may no longer be deductible. Keep a simple record of which loan funded which investment, and when. Plus your accountant will thank you.

Cash flow stress
Your loan repayments are fixed, but dividends can vary or stop. Make sure you have enough in your offset to cover repayments without relying on investment income.

Shares or property?

Both property and shares can work for debt recycling, it just depends on your goals and preferences.

Property usually involves one large recycling event (for example, when purchasing an investment property), which can take longer to save for and requires a bigger commitment. It may appeal to those who want to grow a property portfolio and don’t mind being a bit more hands-on.

Shares and ETFs, on the other hand, can be easier to manage — you can start with smaller, regular investments and gradually build up over time.

Some people focus their recycled portfolios on higher-yielding Australian shares with franking credits to boost income. Others prefer growth-oriented portfolios, accepting more variable returns in exchange for potentially lower taxable income along the way.

In the end, the right mix depends on your strategy, comfort level, and goals, there’s no one-size-fits-all approach.

P&I or interest-only?

It’s most common to have principal and interest (P&I) repayments on both your main home loan and your investment loan. This helps you steadily pay down both debts over time.

That said, it is possible to set up the investment split as interest-only, which can help improve cash flow and make tracking easier. However, interest-only loans are less common and often come with slightly higher interest rates.

Whether that trade-off makes sense depends on your tax position, investment income, and long-term goals - so it’s worth chatting with your broker or adviser to see what’s available and right for your situation.

Who this might suit

Debt recycling can work well if:

• You have a home loan you’ll hold for a while
• You have a stable income and solid buffer in your offset
• You’re in a moderate to high tax bracket
• You’re comfortable with market volatility
• You’re okay with a bit of admin

Who should probably steer clear (for now)

It might not be the right time if:

• You plan to sell or turn your home into an investment property soon
• You’re in a low tax bracket
• Your income is inconsistent or tight
• You’re not up for keeping clean records
• You’d need to sell existing assets just to make the strategy work

Questions I get a lot

Do I need to invest in shares?
No. Property works too. Shares just give you more flexibility to recycle in smaller steps.

Should I turn off DRP?
If your goal is to fund future debt recycling, turning off DRP and letting dividends land in cash can help. If dividends are reinvested with the loaned investment funds it may make admin harder to track

Whose name should it be in?
The person in the higher tax bracket may benefit more now, but think about who will eventually pay tax on the gains or income. Sometimes a split between partners works better, but talk to your accountant and broker about what's possible.

How often should I do this?
There’s no set pace, it depends on your cash flow, offset balance, and comfort with risk. A simple approach is to set a target amount (say $20,000), save it in your offset, then work with your broker to recycle that portion when you’re ready.

What if I sell my investment?
Once you sell, that portion of the loan often stops being deductible unless you reinvest. Keep records and speak with your tax adviser before making changes.

A quick action plan

1. Map your risk tolerance and long-term goals
   
2. Confirm your cash buffer and income stability
   
3. Talk to your broker about creating separate loan splits
   
4. Set up clean accounts to avoid mixing personal and investment funds
   
5. Decide your investment mix and whether DRP is on or off
   
6. Keep a basic tally of loan splits, rates, and investments
   

Final thoughts

Debt recycling isn’t about taking on more debt. It’s about using your existing home loan more effectively. If you’ve got the right risk profile, cash buffer, and structure, it can be a powerful tool to build long-term wealth outside super.

That said, it’s not for everyone. The setup needs to be clean. Your cash flow needs to be solid. And your goals need to be long term.

We’re glad we did it. It fits our strategy, feels manageable, and gives us a little extra efficiency on something we were planning to do anyway.

If you're curious, the team unpacks all of this in detail on the Get Rich Slow Club podcast. Worth a listen if you want to dive deeper.