Debt recycling: a strategic approach to build wealth, reduce home loans, and minimise tax

Debt is often viewed as a financial burden, particularly when it comes to non-deductible debt like a home loan. However, with the right strategy, it’s possible to turn this liability into an opportunity. One such strategy is debt recycling—a powerful, long-term financial strategy that aims to reduce non-deductible debt, build wealth through investment, and enhance tax efficiency.

What is debt recycling?

Debt recycling is a structured approach to transform non-deductible debt (such as a home loan) into tax-deductible investment debt while simultaneously building an investment portfolio. The strategy involves using available home equity to invest in income-producing assets, and then using the income and tax benefits from those investments to accelerate repayment of the original home loan.
Over time, the original non-deductible loan is replaced by a fully deductible investment loan.

How debt recycling works: step-by-step

1. Consolidate personal debts
   Combine personal debts – such as credit cards, personal loans, and car loans—into the home loan, where interest rates are typically lower.
2. Access home equity for investment
   Use available equity in the family home as security for a new, investment-purpose loan.
3. Invest in income-producing assets
   Allocate the borrowed funds into assets such as shares, managed funds, or investment property that generate income and have long-term growth potential.
4. Use investment income and tax benefits to repay the home loan
   Direct the income earned from the investment, along with any tax savings from interest deductibility, towards reducing the principal on the non-deductible home loan.
5. Recycle the paid-down amount into more investments
   As the home loan is paid down, increase the investment-purpose loan by an equivalent amount and reinvest in additional income-producing assets.
6. Repeat annually
   This process can be repeated each year until the non-deductible home loan is fully replaced by tax-deductible investment debt—and a substantial investment portfolio has been built in the process.

Why consider debt recycling?

Debt recycling offers a three-tiered benefit that few strategies can match:

• Wealth creation
  By investing borrowed funds into growth assets, you’re actively building a portfolio that could grow over time and generate future income.
• Home loan reduction
  The strategy accelerates the repayment of your home loan by directing investment income and tax savings toward principal reduction.
• Tax efficiency
  As the non-deductible home loan is gradually replaced with deductible investment debt, overall tax efficiency improves – particularly for higher-income earners.

Is debt recycling right for you?

Debt recycling can be highly effective, but it is not suitable for everyone.

To implement this strategy successfully, the following conditions should apply:

• Reliable income
  A stable employment or business income is essential to meet loan repayments and manage cash flow.
• Risk tolerance
  This strategy increases your overall debt level and exposes you to market risk. A moderate to high risk tolerance is necessary.
• Long-term focus
  This is not a short-term fix. Debt recycling requires a commitment to long-term investing and disciplined financial management.