Debt recycling: the lending side
Debt recycling means paying down your home loan with spare cash, then borrowing the same amount back in a separate loan split to invest. Your total debt stays about the same, but more of it is for investing, and interest on money borrowed to earn income can be tax deductible. It only works if the loan is set up so the investment borrowing stays separate, and it carries the risks of borrowing to invest.
How it works, step by step
Split the loan.
Your home loan is divided into two parts: the existing home part, and a new, separate split kept only for investing.
Pay down the home part.
Savings or surplus cash go into the home part, reducing it.
Borrow it back in the investment split.
The same amount is drawn from the investment split, so total debt is unchanged.
Invest it.
The money goes straight into investments that earn income, such as shares or managed funds, never through a personal account.
Repeat.
Each time, the home part shrinks and the investment split grows by the same amount.
Why the purpose of the money is everything
Whether interest is deductible depends on what the borrowed money is used for, not on which loan it came from. The ATO's ruling on redraws and lines of credit, TR 2000/2, treats money redrawn from a loan as a new borrowing, judged by what that money is spent on. That's why debt recycling lives or dies on keeping the investment borrowing clean and traceable.
Whether it's deductible for you, and what records you need, is your accountant's call, not a broker's. This page covers how the loan has to be set up.
Is debt recycling worth it?
It can be, for someone with a steady income, spare cash every month, a long time to invest, and the stomach for investments falling as well as rising. It turns money you'd have used to pay down the home loan into an investment, financed by debt, so you take on investment risk you otherwise wouldn't.
It's usually not worth it if your income is uncertain, your spare cash is small or irregular, you'd need the money back within a few years, or you'd lose sleep if the investments fell while the loan stayed the same.
What can go wrong
The investments fall. The loan doesn't. You still owe the full amount, and you may have to sell at a loss to repay it.
Your cash flow tightens. You're paying interest on borrowed money for investing, and if your income drops, the repayments don't.
The deduction is lost. If the investment split is used for anything personal, or the money passes through a mixed account, the interest can stop being fully deductible.
Rates rise. The interest on both splits goes up, whatever the investments are doing.
The loan structure it needs
Separate splits. The home part and the investment part must be separate loan accounts, each used for one purpose only. One loan used for both makes the interest hard to apportion.
A clean path for the money. Money drawn from the investment split goes straight to the investment, not through your everyday account. Keep records of every draw and what it bought.
Lenders differ on how many splits they allow, whether each split can be redrawn on its own, whether a split can sit at zero without closing, and whether an offset account can sit against the home part only. Which lenders handle this well is the main thing to check before you start.
The one mistake that undoes it
A single draw from the investment split for something personal, such as a car or a holiday, mixes the purpose of that split. From then on, the interest has to be divided between the investment and the personal use, and the records get hard to defend. It's the most common way debt recycling goes wrong, and it's avoidable if the structure makes it hard to do by accident.
What it looks like after one year
An illustration, not a client file. A $600,000 home loan, and $20,000 of spare cash in a year. The $20,000 pays the home part down to $580,000, and $20,000 is drawn from the investment split and invested. Total debt is still $600,000: $580,000 on the home and $20,000 for investing. At an illustrative 6.00% interest rate, the investment split costs about $1,200 a year in interest, and whether that's deductible is your accountant's call.
How a lender looks at it
Setting up a split is usually simple if your total loan stays the same. If the plan needs a larger limit on the investment split, the lender assesses you again: your income has to cover the full loan at a rate at least 3 percentage points above the one you'd pay. Since February 2026, APRA has also capped how much of each bank's new lending can go to people whose debts are six or more times their income.
Where a broker's job ends and an adviser's begins
My job is the loan: the splits, the features, the lender that can run the structure cleanly, and an application that gets it approved. Whether debt recycling suits you, what to invest in, and how the tax works are questions for a licensed financial adviser and your accountant. I'm happy to work alongside them.
Debt recycling questions
Paying down your home loan with spare cash, then borrowing the same amount back in a separate loan split to invest. Total debt stays about the same, but more of it is for investing, and interest on money borrowed to earn income can be tax deductible.
Getting the loan side right
Tell me what you owe, what the home is worth, your income, and roughly how much spare cash you have each month. I'll show you the split structure, which lenders run it cleanly, and what to check with your adviser and accountant.
You'll hear back within the hour in business hours, and by 9am the next business day after hours.
Sources
- 1
ATO, Taxation Ruling TR 2000/2, deductibility of interest on money drawn down under line of credit and redraw facilities.
- 2
APRA, debt-to-income limit from 1 February 2026, and serviceability buffer of at least 3 percentage points. Read 29 September 2026.
- 3
The illustration: Money Brain's arithmetic on the stated example.
Updated 2 October 2026