Nick learns debt recycling
2nd Mar 2026
One of possibly-more-than-one blog posts about things I learn about
I’m lucky enough to have purchased a house, and something I’ve seen suggested on the internet is to make use of debt recycling to get the most value out of it. I did some googling, and found that the way debt recycling is communicated is frustringly opaque. “Do it bro, you’ll make money” isn’t enough for me, so I’ve written this up to teach it to myself. But obviously, take it all with a grain of salt.1
The Analogy
I have a briefcase full of money that I want to invest. First, I give the briefcase to my bank to pay down my home loan. Then, I take out an investment loan of the same amount, and they hand me the briefcase back. I’m in a similar position to before - same amount of money, same amount of debt. But now some of my debt is tax deductible. This is the fundamental aspect of debt recycling.
The Numbers
Let’s say the briefcase has $ in it. I know my tax bracket is %.
Option 1 - Keep it in a savings account
My savings account has an interest of%. I can take it out whenever I like, but I'm paying tax on the interest.
| Interest | 10,000 × 4.5% | $450.00 |
| Tax | 450 × 37% | −$166.50 |
| Net | $283.50 |
Option 2 – Pay down the mortgage
My mortgage has an interest of % per year. If I pay it down faster, I pay less to the bank. I have an offset account to keep the money accessible.
| Interest saved | 10,000 × 5.6% | $560.00 |
| Net | $560.00 |
Option 3 – invest in shares
This is where things get tricky. Firstly, nobody can predict the actual returns and this method carries substantially more risk. But we do know over 10+ years, the noise has always averaged out to a steady increase, and governments are strongly incentivised to sustain this steady growth. Secondly, the returns are made up of two components: growth (the value of the shares increasing) and dividends (company profits being paid to you). Growth is taxed when it is sold (Capital Gains Tax, CGT), with a 50% tax discount if you don't sell it for at least a year. Dividends are taxed the same as regular income. It gets more complicated than this for things with franking credits and property. I have a few shares in Vanguard's VDHG, and the historical returns over the last 10 years are roughly% growth, % dividends per year.
| Growth | 10,000 × 6.3% | $630.00 |
| CGT (50% disc) | 630 × 37% ÷ 2 | −$116.55 |
| Dividends | 10,000 × 3.7% | $370.00 |
| Dividend tax | 370 × 37% | −$136.90 |
| Net | $746.55 |
Option 4 – debt recycling
This is like a combination of options 2 and 3. I pay off the mortgage, then redraw the money as an investment loan, using that money to buy shares. The key difference here is that the interest on the new loan is tax deductible. I found it very difficult to find published rates for investment loans, particularly for redraw. I contacted Macquarie to get their interest rate for this, which was quoted at%.
| Mortgage net | (from option 2) | $560.00 |
| Shares net | (from option 3) | $746.55 |
| Loan interest | 10,000 × 5.6% | −$560.00 |
| Tax deduction | 560 × 37% | $207.20 |
| Net | $953.75 |
| Principal | $ |
| Tax bracket | % |
| Savings rate | % |
| Mortgage rate | % |
| Investment growth | % |
| Dividends | % |
| Loan rate | % |
| Savings account | $283.50 |
| Pay down mortgage | $560.00 |
| Invest in shares | $746.55 |
| Debt recycling | $953.75 |
As part of this, I asked myself - why not take out an investment loan by itself? It has the same tax deduction benefits. Firstly, the interest rate will be higher. Secondly, the loan isn’t backed by an asset, so the lender may “margin call” the loan. This is where the value of the investments drop, and the lender demands immediate repayment to cover that my loan is bigger than the value of the shares. If I don’t have that money on-hand, they could force me to sell my shares at a loss.
Footnotes
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This is not financial advice, I’m not an accountant, it’s a massive simplification, and it ignores several factors such as the impact of compounding interest from monthly payments. ↩