Debt recycling is a strategy sometimes used in Australia to gradually convert non-deductible home loan debt into investment debt while building an investment portfolio over time. For many Australians the family home represents their largest financial commitment, so understanding how different strategies may influence long-term wealth outcomes is important.
What Is Debt Recycling?
In simple terms, debt recycling involves paying down part of a home loan and then re-borrowing those funds through a separate loan split to invest.
- Extra repayments are made to the home loan
- A separate loan split is created by the lender
- The same amount is re-borrowed for investment purposes
- The borrowed funds are invested into a diversified investment portfolio
When structured correctly, the interest on the investment loan may become tax deductible because the borrowed funds are used to generate investment income.
Benefits Investors Often Consider
- Starting investments earlier rather than waiting until the mortgage is repaid
- Allowing compounding to work over a longer timeframe
- Potentially improving tax efficiency depending on individual circumstances
- Building investment assets while gradually reducing mortgage debt
Risks and Considerations
- Borrowing to invest increases exposure to market volatility
- Stable income and strong surplus cashflow are important
- Loan structuring must be correct to maintain tax deductibility
- The strategy is not suitable for every investor
Key Modelling Assumptions
- Starting property value: $1,000,000
- Starting mortgage: $800,000
- Mortgage interest rate: 5.5%
- Annual surplus cashflow available: $25,000
- Investment return assumption: 7% per year (conservative)
- Property growth assumption: 4% per year (conservative)
- Time horizon: 25 years
Historical Share Market Returns
| Index | 10 Year Avg | 20 Year Avg | 30 Year Avg |
| S&P 500 (US Shares) | ~12% p.a. | ~10% p.a. | ~10% p.a. |
| Australian Shares (ASX) | ~9% p.a. | ~9% p.a. | ~9.8% p.a. |
| MSCI World Index | ~10% p.a. | ~8–9% p.a. | ~8–9% p.a. |
Historical Australian Property Growth
| Period | Average Australian Property Growth |
| 10 Years | ~6–8% p.a. |
| 20 Years | ~6–7% p.a. |
| 30 Years | ~5.4–6.8% p.a. |
How the $25,000 Annual Surplus Cashflow Is Used
Each scenario assumes the household has $25,000 of surplus cashflow available every year. The difference between the strategies is how that surplus cashflow is allocated.
| Strategy | Years 1–10 | Years 11–25 |
| Mortgage Only | $25k used for additional home loan repayments | $25k used for additional home loan repayments |
| Mortgage First Then Invest | $25k used for additional home loan repayments | $25k invested into diversified investments |
| Invest Earlier | $25k invested into diversified investments | $25k invested into diversified investments |
This ensures the comparison is fair because the same $25,000 annual surplus cashflow is used in each strategy. The only difference is when investing begins.
25-Year Outcome Summary
| Strategy | Investment Portfolio | Mortgage Balance | Estimated Net Wealth |
| Mortgage Only | $0 | $175,000 | $2,491,000 |
| Mortgage First Then Invest | $636,000 | $175,000 | $3,127,000 |
| Invest Earlier | $1,582,000 | $175,000 | $4,073,000 |
Key Takeaway
In this simplified example, starting investments earlier results in a larger investment portfolio and higher overall net wealth after 25 years. The difference is primarily driven by time in the market and the power of compounding.
Debt Recycling FAQs
- What is debt recycling in Australia? Debt recycling is a strategy that converts non‑deductible mortgage debt into investment debt while gradually building an investment portfolio.
- Is debt recycling risky? Debt recycling involves borrowing to invest which increases exposure to market volatility. It is generally more suitable for investors with stable income and long investment timeframes.
- How much income do you need for debt recycling? There is no fixed income requirement, but households typically need surplus cashflow after living expenses and mortgage repayments.
- Is debt recycling better than paying off your mortgage? It depends on factors such as risk tolerance, investment timeframe, income stability and broader financial goals.
- Does debt recycling work with investment properties? Debt recycling is most commonly applied to owner‑occupied home loans, although broader debt structuring strategies may apply to investment property owners.
How EPG Wealth Can Help
Debt recycling can be a powerful long‑term wealth strategy when structured correctly. However it requires careful planning, correct loan structuring and disciplined investing.
- Reviewing your mortgage structure and loan splits
- Assessing cashflow capacity to ensure the strategy is sustainable
- Designing appropriate debt structures with lenders
- Building investment portfolios aligned with your risk profile
- Providing ongoing portfolio monitoring and advice during market cycles
Speak With EPG Wealth
If you would like to understand whether debt recycling could improve your long‑term financial position, the team at EPG Wealth would be happy to help.
EPG Wealth works with professionals, business owners and families across Australia to design clear, disciplined and tax‑aware investment strategies.
Click here to organise a complimentary 20-minute phone call with an EPG Wealth adviser.
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General Advice Disclaimer: This information is general in nature and does not take into account your personal objectives, financial situation or needs.