Debt Recycling Explained: How the Loan Set-Up Works

Debt recycling is a way of structuring your loans so that, over time, the non-deductible debt on your home is replaced with debt used to invest. You pay down the home loan, borrow the same amount back through a separate loan split and invest it. Whether the new interest is tax-deductible depends on how the borrowed money is used.

How does debt recycling work, step by step?

1. Split the loan. One split stays as your home loan. A second split, or a line of credit, is set up for investing.
2. Pay down the home loan split with savings, a bonus, a tax refund or investment income.
3. Borrow the same amount from the investment split and use it to buy income-producing investments.
4. Put the investment income back into the home loan split, then repeat.
5. Over time the home loan split shrinks and the investment split grows. Your total debt stays about the same; what changes is the kind of debt.

What decides whether the interest is deductible?

The use of the borrowed money, not the property it is secured against. The ATO’s ruling on redraw and line of credit facilities, TR 2000/2, applies that test to each drawing: money drawn to produce income can make the interest deductible, and money drawn for private use cannot. Where a single loan is used for both, the interest is apportioned between them.

That is why the structure matters more than the strategy. A clean investment split, used only for investing, keeps the records simple. Mixing private spending into it does not.

Why does a separate loan split matter?

The guide to fixed, variable and split loans explains how splits are set up, and a line of credit is another way to hold the investment side.

A worked example

Say you recycle $50,000. At the 6% example rate, interest on the investment split is about $3,000 a year. If that interest is deductible and your marginal rate is 30% plus the 2% Medicare levy, the deduction is worth about $960 a year.

• Your total debt has not fallen. You still owe the $50,000, now on the investment split.
• The investments carry their own risk. They can fall in value as well as rise.
• The benefit compounds only if you keep going, putting income and refunds back into the home loan split each time.

How long does debt recycling take?

As long as you keep a surplus to put through it. Recycling $2,000 a month moves $24,000 a year from home loan debt to investment debt, so on a large home loan the process runs for many years. That is why the plan should be reviewed every year, as rates, your income and tax rules change.

What are the risks?

• Investment losses. You can lose money on the investment and still owe the loan.
• Higher interest rates. Rates on both splits can rise, and investment splits are often priced above owner-occupier rates.
• Cash flow. The strategy depends on a regular surplus. If income drops, the investment debt remains.
• Tax rules. The deduction depends on the use of the money and on tax law at the time. Get advice from a registered tax agent.

Who is debt recycling usually discussed for?

Borrowers with equity in their home, a stable income, a regular surplus each month and a long time frame, who are comfortable with investment risk. It is a poor fit for a tight budget, an uncertain income or a short horizon before retirement.

Can you debt recycle with an offset account?

Not on its own. Money in an offset account reduces the interest on your home loan, but taking it out to invest is investing your own savings. To recycle, the money has to pay down the home loan split first, then be borrowed back through the separate investment split. The offset savings calculator shows what an offset is worth on its own.

What does the lender need to see?

The lender assesses the investment split like any other borrowing: you need enough equity, and the full limit has to fit your borrowing power. It may be treated as investment lending, which can change the rate and the policy. Lenders also differ in how many splits they allow and how small a split can be. The investment loans page covers how lenders assess investment borrowing, and using equity to buy covers how equity is valued.

Who should you talk to?

Three people, each for their own part. A broker sets up the loan structure. A registered tax agent confirms the deductibility for your situation. A licensed financial adviser advises on the investments themselves. Negative gearing rules are changing for property bought from 1 July 2027, so if the investment is property, read what is negative gearing as well.

Questions people ask

Is debt recycling legal?

Yes. It is a way of structuring loans. The tax outcome depends on following the rules on how borrowed money is used, which is why clean records matter.

Can I debt recycle into property instead of shares?

Yes, the principle is the same: the borrowed money has to be used to produce income. Property also brings stamp duty, holding costs and the lender’s investment policy into play.

Does debt recycling reduce my total debt?

Not by itself. It changes the kind of debt. Any reduction comes from the surplus you keep paying in and from the investments performing.

Charles Touma sets up the loan side of debt recycling: the splits, the limits and a structure your accountant can work with. A free 30-minute call covers your equity and how the splits would sit. General information only, not tax, financial product or credit advice; get tax advice from a registered tax agent and investment advice from a licensed financial adviser. Sources: ATO Taxation Ruling TR 2000/2, interest on redraw and line of credit facilities, checked 17 October 2026. Example figures use the 6% example rate.

General information only, not credit, legal or tax advice. Your situation is assessed properly before any recommendation. Government scheme details change; figures are current at the time of writing.