What is Debt Recycling?

Debt recycling is the process of replacing mortgage debt (non-tax deductible) with investment debt (tax deductible).

It works by taking equity out of your property and investing it elsewhere with the aim of generating profits. This profit could then be used to reduce your mortgage or for other expenses.

The goal of debt recycling is usually to pay off your home loan as quickly as possible, while building long-term wealth in a tax-efficient way.

How does debt recycling work?

Debt recycling works by using the equity in your home to invest in income-generating assets with growth potential.

These income-generating assets could be things like investment property, stocks, or ETFs.

Over time, the earnings from these investments can flow into your home loan, which could help pay it off faster than if you just made regular payments.

Generally, interest on investment loans is tax deductible. This means that this strategy has the potential to create tax savings, which can also be applied to your home loan. In addition, if your new investments increase in value, you will build your wealth at the same time.

In theory, this creates a lasting cycle that you can continue until you’ve reached your goal:

  1. Access the equity in your home.

  2. Use equity to borrow against your home.

  3. Wait for these investments to increase in value.

  4. Use these earnings to pay off your original home loan.

Benefits of Debt Recycling

  • Could generate amplified compound earnings that could be used to pay off your original loan sooner and save on interest charges.

  • Allows you to diversify your portfolio into multiple investments.

  • Investments could earn you passive income

Disadvantages of Debt Recycling

  • Losses amplified during market downturn.

  • Potentially higher interest rates on loans used for investments

  • Variable rates change over time. If your loan is not fixed rate when interest rates rise, you will have to pay more interest.

  • Like any investment strategy, debt recycling is risky if you need to access the money invested in leads in the near future.

What is Equity?

Your equity in a home is the value of the property minus the amount you owe on the mortgage attached to it.

Useful tool: Equity Calculator

Equity is how much of your home you Actually own. Most people don’t directly own their home – they own part of it and the rest is paid off through their home loan. Home equity is the difference between the current value of your home and the amount owed on the mortgage.

Example: Augustine buys a house for $500,000 with a 20% down payment ($100,000 of her own savings) and a home loan of $400,000. His net worth in the property at this point is $100,000.

In 10 years, she pays off $150,000 of the principal of the home loan (leaving $250,000 owed) and the value of the property rises to $550,000. Augustine’s net worth in the house is now $300,000 ($550,000 minus $250,000).

How to access equity?


One of the most common methods of accessing equity in a property is to refinance the mortgage. When you refinance, you leave your current mortgage and switch to a new mortgage.

When you refinance, your property may also be revalued.

Reappraisal of your property can show that your home has increased in value, which means you can access more equity.

The timing of your property revaluation is crucial, as changes in the market can also mean that your property has lost value or remained the same as when you bought it.

When digging into your capital, it is important to note that you will always have to pay it back eventually. Basically, you’re taking out the principal amount you’ve paid off, so you’ll end up paying it back plus interest over time.

Ease of redrawing

If your mortgage comes with a drawdown facility, this is another potential way to access some of the equity in your home. When you make additional payments for your home loan, they are applied only to the principal amount of the loan, rather than to the principal and interest, and thus strengthen your capital. If you’ve made enough additional contributions, you could potentially have a stack of cash to withdraw. Again, you’ll have to pay that money back over time plus interest.

Other ways to access equity:

The two cents from Savings.com.au

Debt recycling may be a concept you consider in order to pay off your mortgage faster than your scheduled repayments. Before doing so, we recommend that you speak to an expert or a financial advisor. Having considerable equity reinvested exposes you to the risk of changes in the market. Without a safety net and a stable income, you could put yourself at considerable financial risk. On the other hand, if you have considerable financial security, debt recycling could potentially speed up your mortgage payment and overall wealth growth.


Buying an investment property or looking to refinance? The table below shows home loans with some of the lowest interest rates on the market for investors.


Rate type Gap Redraw Ongoing charges The initial costs LVR Lump sum reimbursement Additional refunds Pre-approval

Variable More details

Low Rate Home Loan – Premium (Principal and Interest) (Investment) (LVR
  • No upfront or ongoing fees
  • 100% cleared account
  • Additional refunds + withdrawal services

Variable More details

Nano Home Loans Variable investor, principal and interest (refinance only)

  • No application or ongoing fees.
  • 100% free clearing sub-account.
  • Fast online application, approval in minutes not weeks.
  • Mobile app, Visa debit card, Apple and Google Pay
  • Refinance loans and variable rates only.
Variable More details
Variable More details

Smart Investor Home Loan (Principal and Interest) (LVR
  • Possibility to add an offset of 0.10%
  • Fast turnaround times, can meet 30 day settlement
  • No ongoing or monthly fees

Basic criteria: a loan amount of $400,000, variable, fixed, principal and interest (P&I) real estate loans with an LVR (loan-to-value) ratio of at least 80%. However, the “Compare mortgages” table allows calculations to be made on the variables selected and entered by the user. All products will list the LVR with the product and price list which is clearly published on the product supplier’s website. Monthly repayments, once the basic criteria are modified by the user, will be based on the advertised prices of the selected products and determined by the loan amount, repayment type, loan term and LVR as entered by the user. user/you. *The comparison rate is based on a loan of $150,000 over 25 years. Please note: this comparison rate is only true for this example and may not include all fees and charges. Different terms, fees or other loan amounts may result in a different comparison rate. Rates correct as of January 18, 2022. See disclaimer.

Image by Pawel Czerwinski via Unsplash

The whole market has not been taken into account in the selection of the above products. Instead, a reduced portion of the market was considered. Products from some vendors may not be available in all states. To be considered, the product and price must be clearly published on the product supplier’s website. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au and Performance Drive are part of the Savings Media group. In the interest of full disclosure, Savings Media Group is associated with Firstmac Group. To learn how Savings Media Group handles potential conflicts of interest, as well as how we are paid, please visit the website links at the bottom of this page.

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