Managing debt smartly can be one of the best ways to build long-term wealth. One strategy many property owners use is debt recycling. This approach helps you turn your home loan — which is non-deductible debt — into investment debt, which may be tax-deductible. At Hayes Financial, we stress that it isn’t for everyone, but when structured correctly, it can be a powerful tool to accelerate wealth creation.
What is Debt Recycling?
Debt recycling is the process of gradually converting your home loan into investment debt. You reduce your home loan balance, then borrow against the equity you’ve built to invest in assets such as shares, managed funds, or investment property. Over time, more of your debt becomes deductible, and you’re building an investment portfolio alongside paying down your home loan.
How Does it Work?
Here’s how the process typically looks:
- You make additional repayments on your home loan to reduce non-deductible debt.
- You borrow back (via redraw, refinance, or a split loan) against the equity created.
- The borrowed funds are invested into income-generating or growth assets.
- The interest on the investment portion is generally tax-deductible.
- Over time, your home loan shrinks, your investments grow, and more of your debt is working for you.
Example of Debt Recycling in Action
Imagine your home is worth $600,000 and your current mortgage is $300,000, giving you $300,000 in equity. You decide to use $100,000 of that equity to invest. You keep paying your mortgage as normal, but now you also have an investment loan of $100,000. If your investment earns an average return of 7% per year and your investment loan costs 5.5% interest, the returns can cover the loan interest and potentially create extra income. On top of that, the interest on your investment loan is tax-deductible, unlike your home loan. Over time, you’ve reduced your home loan, built an investment portfolio, and shifted debt from non-deductible to deductible.
Things to Consider
Debt recycling comes with risks. Markets can fluctuate, meaning investments may not always perform as expected. Rising interest rates can increase repayments, and you must be disciplined with budgeting to ensure cash flow remains stable. It’s also important to understand the tax rules and ensure the strategy aligns with your long-term goals.
Is it Right for You?
Debt recycling may suit homeowners with stable incomes, solid equity, and a willingness to take on investment risk for long-term gains. It’s not a short-term strategy and works best when approached with discipline and advice.
How Hayes Financial Can Help
At Hayes Financial, we’ll help you assess whether debt recycling is right for you. We model your equity, explain the tax implications, and design a loan structure that balances risk with opportunity. Our role is to simplify the process and guide you through each step so you can make confident, informed decisions.