Debt Recycling: The Step-by-Step Guide to Making Your Mortgage Tax-Deductible
- Ben De Rosa
- Feb 17
- 5 min read
Debt recycling: Australia tax deductible mortgage
For most Australians, the home mortgage just sits there costing money. You make payments every month, the bank keeps the interest, and the ATO gives you nothing. That's what accountants call bad debt: money owed on a personal asset that generates no income and no tax benefit.
Debt recycling is a strategy that changes what your debt is doing, without changing how much of it you have. Done carefully, it converts your non-deductible home loan into a tax-deductible investment loan, and the tax refunds it generates help you pay down the mortgage faster.
This article covers how it works, the two mistakes that break it, and the team you need to do it properly.
Our Client's Experience:
"Very impressed with the level of service and professionalism I received from Aevum. They made a daunting task extremely easy for me. I highly recommend them."
— Martin Brown
A quick note: Aevum Accounting provides tax advice on how to structure your loans so that interest is deductible. We don't provide financial advice. For investment selection and risk assessment, you need a qualified financial planner.
How Is Debt Recycling Different from Just Borrowing to Invest?
Borrowing to invest, or gearing, usually means taking on a new loan on top of your existing mortgage. Your total debt goes up.
Debt recycling works differently. You're not adding new debt. You're paying down part of your home loan and then redrawing the same amount with a different purpose. The total debt stays the same. Only the tax treatment changes.
The Four Steps
Save. Set aside a lump sum from your income, dividends, or tax refunds. Say $10,000.
Pay down. Put that $10,000 directly into your variable home loan account, reducing the balance.
Split and redraw. Ask your bank to set up a separate loan split for that $10,000, then redraw it as a new, distinct borrowing.
Invest. Use the redrawn $10,000 to buy income-producing assets, usually ASX shares or ETFs that pay regular dividends.
Because the redrawn money was used to buy investments, the interest on that loan split becomes tax-deductible. You then take the dividends and the annual tax refund and put both back into paying down the home loan, then repeat the process.
Over time, the home loan shrinks and the investment loan grows. Eventually the mortgage hits zero and every dollar of your remaining debt is working for you, not against you.
The Two Mistakes That Break the Strategy
Mistake 1: The contaminated loan. This is the most common and most expensive error. It happens when someone pays down $50,000 on their home loan and then simply redraws from the same account number to buy shares.
Now you have one account holding $450,000 of private debt and $50,000 of investment debt all mixed together. You can't unmix it. Every repayment you make from that point has to be split proportionally between the two purposes, which means you're slowly paying off your deductible debt, the part you want to keep.
The fix is clean loan splits. Loan A covers the home debt and you pay that down aggressively. Loan B covers the investment debt and stays interest-only to maximise the deduction. Separate account numbers, separate purposes, clean records.
Mistake 2: Using the offset account. People see $50,000 sitting in an offset account and think they can just transfer it straight to a brokerage account to buy shares. That's not debt recycling.
Money in an offset account is your savings. There's no borrowing happening. To make the interest tax-deductible, there has to be an actual borrowing event: move the cash from the offset into the loan, reducing the balance, then formally redraw it back out. That redraw is what creates the new borrowing purpose. Skipping that step and transferring directly from offset to shares is just spending your own money, and the interest stays non-deductible.
What You Can Invest In
The ATO is fine with debt recycling when the purpose is genuinely to generate income. The key word is income.
Generally fine: diversified portfolios of ASX 200 shares, ETFs, and other assets that pay regular dividends. The expectation of dividend income is what justifies the interest deduction.
Generally not fine: vacant land with no rental income, holiday homes you don't rent out, and speculative assets like gold or crypto unless there's a clear regular income stream. The ATO's Part IVA anti-avoidance rules can cancel your deduction if the arrangement looks like it was set up purely for a tax benefit.
Property vs. Shares: Different Approaches
Property suits a big-chunk approach. You create one large loan split (say $100,000) and use it as a deposit on an investment property. It's a single transaction that doesn't happen often.
Shares work better as a drip-feed. Most investors save in batches every few months and do one recycle transaction per batch. Banks won't create a new loan split each month, so batching keeps the admin under control.
This Is a Long-Term Strategy
Year 1: you might recycle $20,000 and save $500 in tax. It doesn't feel like much. The snowball is just starting.
Year 5: you may have recycled $150,000. Your tax refund could be $4,000 a year and your portfolio has hopefully grown.
Year 10: the home loan may be fully paid off. You own a debt-free home and hold a substantial share portfolio, all built from the same debt you already had.
The Risks
Market risk: if you borrow $100,000 against your home to buy shares and the market drops 50%, you still owe the bank $100,000. Your home is the security. This is why you need a financial planner involved before you start.
Interest rate risk: if rates rise, the cost of your investment loan increases. You need your dividends or personal cash flow to comfortably cover the interest.
Who You Need on Your Team
This isn't a strategy you should try to run on a spreadsheet. You need three people:
A mortgage broker who knows how to structure loan splits properly
A financial planner to design the investment portfolio and assess your risk tolerance
Ben De Rosa at Aevum Accounting to handle the tax structure, keep the loan splits clean, and make sure you don't accidentally walk into a Part IVA problem
If you want to run the numbers on your specific situation, reach out to Aevum Accounting. Ben can model the tax impact, design the right loan structure, and connect you with the other professionals you need.
Disclaimer: The information and strategies shared in this article are for general informational purposes only and do not constitute specific tax or financial advice. Everyone's situation is unique, and tax laws are complex and constantly evolving. For personalized advice tailored to your specific individual or business needs, we always recommend consulting with a qualified professional at Aevum Accounting.
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