What is debt recycling and how does it work in Australia?
Debt recycling is a legal Australian wealth strategy that converts the interest on your home loan — which is not tax-deductible — into interest on an investment loan, which is tax-deductible. The total amount of debt stays the same. The total monthly outgoings stay the same. What changes is the tax treatment of the interest, and the simultaneous growth of an investment portfolio alongside your mortgage.
The strategy works because of a specific rule in Australian tax law: interest on money borrowed to purchase income-producing investments is deductible against your income. Interest on your home loan is not, because your family home doesn't produce income. Debt recycling exploits this asymmetry legally and systematically.
The four steps of debt recycling
- Make an extra repayment: You pay extra principal off your home loan — say $1,000 per month. This reduces your loan balance and frees up redraw capacity.
- Redraw the same amount: You immediately redraw the $1,000 you just repaid. Because the stated purpose of this redrawn amount is investment, the ATO treats it as investment debt.
- Invest in income-producing assets: The redrawn funds are invested into ASX shares or broad-market ETFs that pay dividends. VAS, A200, and similar fully-franked ETFs are the most common choice.
- Repeat: Each month, the cycle continues. Dividends and tax refunds are used to make additional home loan repayments, accelerating the recycling. Over time, your non-deductible debt shrinks and your investment portfolio — and its associated deductible debt — grows.
The tax benefit explained
At a 32.5% marginal tax rate, every $10,000 of investment loan interest generates approximately $3,250 in tax savings. On a fully recycled $500,000 investment loan at 6%, that's $30,000 interest generating nearly $9,750 in annual tax savings. This is real money flowing back to you from the ATO every financial year.
Fully franked dividends add another layer. An ASX ETF paying 4% dividends on a $200,000 portfolio generates $8,000 in cash dividends. With 100% franking, the grossed-up amount is $11,429 — and at 32.5%, after the franking credit offset, you receive an additional benefit of approximately $2,900. This flows back into the home loan, accelerating repayment.
Critical compliance rule: The ATO requires the investment debt to be in a separate loan account or formal split — not combined with your home loan balance. If you use an offset account, the strategy does not qualify. Talk to your bank about splitting your loan before you start.
Who does debt recycling suit?
Debt recycling works best for Australian homeowners who are already making extra mortgage repayments, have a redraw facility on their loan (not an offset account), have a taxable income in the 32.5%, 37% or 45% bracket, and have a long time horizon of at least 7–10 years. The strategy requires consistent discipline and the ability to hold investments through market volatility without selling.
It is less suitable for people who might need to access their investment funds in the short term, those with unstable income, or those with very small loan balances where the administrative overhead outweighs the tax benefit.
How this calculator works
The calculator runs a year-by-year simulation comparing two scenarios. The baseline scenario applies your extra repayment directly to the loan with no investment. The recycling scenario applies the same extra repayment to the loan, redraws it, and invests it — then separately models the tax deduction on investment debt interest, dividend income, and franking credit benefits each year, using all of this to accelerate the home loan repayment. The advantage is the difference in net financial position between the two scenarios after your chosen time horizon.
Dividend yield is modelled separately from capital growth (no double counting). Franking credits are calculated using the correct grossing-up formula: franking credit = cash dividend × (30/70), and the net benefit at your marginal rate. The model uses the correct Australian tax brackets for 2025–26.