| Item | Debt recycling | Paying off the home loan |
|---|---|---|
| Home loannot deductible | - | - |
| Investment loandeductible | - | $0 |
| Investments | - | - |
| Net position | - | - |
Net position is investments less loans. Your home's value is left out because it's the same in both columns. Both columns use the same money each year, which is the interest on today's balance plus what you entered as paid off each year. That money goes on the loans first, then into investments. Tax on the investment income and the refund on the interest are counted each year. Figures are before capital gains tax on a sale. That tax falls mostly on the debt recycling column, which holds more investments, so the gap shrinks if you sell.
Swipe the table for the loans and investments.
| Financial year | Net position: debt recycling | Net position: paying it off | Debt recycling: home loan | Debt recycling: investment loan | Debt recycling: investments |
|---|
Thinking of using debt recycling to buy an investment property?
Book a free discovery call and we'll work through what your investment split could buy.
Book a Free Discovery CallHow debt recycling works
Interest on a home loan isn't tax deductible, but interest on money borrowed to invest can be. Debt recycling uses that difference. You pay money off your home loan, then redraw the same amount through a separate loan split and invest it. Your total debt stays the same. Each dollar you recycle comes off your home loan and onto the investment split, where the interest can be claimed.
The investment income and the tax refund on the deductible interest are paid into the home loan and redrawn to invest too. This debt recycling calculator models that and compares it with using the same money to pay the home loan off.
The ATO looks at what the borrowed money is used for, and it treats a redraw as a new borrowing. So interest on money you redraw to buy shares or an investment property can be deductible. Money taken out of an offset account is your own savings, not a borrowing, so investing it doesn't make any interest deductible.
Why debt recycling needs a separate loan split
If you redraw from the same loan that holds your home debt, the loan has two purposes and the interest has to be apportioned between them. Repayments then come off both parts in proportion, so you can't pay the home part down first. Every redraw also changes the proportion.
A separate split used only to invest avoids that. All of its interest relates to the investments, and repayments on the home loan split come off the home debt alone. Ask your lender or broker to set the split up before the first redraw, and keep the investment money out of your everyday accounts.
Debt recycling vs paying off your home loan
Debt recycling and paying off the home loan use the same money each year. Paying the home loan off saves interest at your home loan rate. Debt recycling keeps the total debt where it is and puts the money into investments instead.
Debt recycling comes out ahead when the investments return more after tax than the interest costs after tax. At a 6.5% rate and 39% tax, the interest costs 3.97% a year after tax. If your investments grow 4% a year and pay 4% a year in dividends, they return 6.44% a year once tax on the dividends comes off. Returns move around from year to year, so you want them comfortably above that 3.97%.
With debt recycling, the interest on the investment split comes out of what you pay each year, so the home loan takes longer to clear than if you just paid it off. You pay more home loan interest in the meantime, and none of it is deductible. In the worked example below, the home loan clears in year 17 instead of year 16.
If returns fall short of the after-tax interest cost, or the market is down when you need to sell, paying the loan off wins. The year-by-year table shows the gap in every year.
Using debt recycling to buy an investment property
The investment split can also fund the deposit and costs on an investment property, and the interest on it can be deductible because the money is used to earn rent. Our equity recycling calculator models buying property this way, with growth in each property funding the next deposit.
The rules on rental losses change from 1 July 2027. If you signed the contract on an established investment property after 7:30pm AEST on 12 May 2026, a rental loss on it can only offset residential rental income or a residential capital gain, not your salary or other income. Whatever is left carries forward. The interest is still deductible, but the tax refund may come later.
Worked example: debt recycling on a $600,000 home loan
This is the scenario the calculator opens with. You owe $600,000 at 6.5% and pay $20,000 a year off the loan. You have $30,000 in savings. You pay 39% tax including the Medicare Levy, and assume your investments grow 4% a year and pay 4% a year in dividends.
With debt recycling, the last of the home loan is recycled in year 17. After 20 years you hold $1,114,473 of investments against a $600,000 investment loan. Over those years you can claim $403,306 of interest, which saves $157,289 in tax.
If you pay the home loan off instead, it clears in year 16. After that, what you were paying on the loan goes into investments. By year 20 you hold $281,934 with no debt. Debt recycling is ahead by $232,539, before capital gains tax on selling the investments.
Debt recycling is paying down your home loan and redrawing the same amount through a separate loan split to invest. Your total debt stays the same, but more of it is investment debt. Interest on money borrowed to invest can be tax deductible. The investment income and tax refunds are paid into the home loan and redrawn to invest too, until the home loan is fully recycled.
It can be. The ATO looks at what the borrowed money is used for. Interest on money redrawn and used to buy shares, an investment property or other income-producing assets can be deductible. Interest on the part still owed on your home isn't. A redraw counts as a new borrowing, so the interest on each redraw depends on what you use it for.
No. Money taken out of an offset account is your own savings, not a borrowing, so investing it doesn't make any interest deductible. A redraw is treated as a new borrowing, so pay the savings into the loan and redraw them through the investment split instead.
If investment money and home money share one loan, the interest has to be apportioned between them. Repayments come off both parts in proportion, so you can't pay the home debt down first. With a separate split used only to invest, all of its interest relates to the investments. Set it up with your lender before the first redraw.
Yes. The investment split can fund the deposit and costs on an investment property, and its interest can be deductible because the money is used to earn rent. From 1 July 2027, if you signed the contract on an established investment property after 7:30pm AEST on 12 May 2026, a rental loss on it can only offset residential rental income or a residential capital gain, so the tax refund may come later. Our equity recycling calculator models buying property this way.
Your debt stays at the same level while the investments can fall in value, so a downturn hits harder than if you had paid the loan off. Higher interest rates raise the cost of the split. You only get the tax refund if you have other taxable income, like a salary, to claim the interest against. A licensed financial adviser and a tax adviser can check the strategy against your situation before you start.
Sources
- ATO: TR 2000/2, deductibility of interest on money drawn down under line of credit and redraw facilities
- ATO: TR 95/25, deductions for interest under section 8-1
- ATO: TR 93/6, loan account offset arrangements
- ATO edited private advice 1051179013852 (2017, archived): interest after buying shares with redrawn money and with offset money
- ATO: Dividend income deductions
- ATO: Interest expenses on rental properties
- ATO: Personal income tax, new tax cuts (15% to 14% from 1 July 2027)
- Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (No. 49, 2026), Schedule 2