Debt Recycling Series Chapter 6: Different Ways to Debt Recycle
Exploring the Different Paths to Debt Recycling: Which One Suits You Best?
Debt recycling isn’t a one-size-fits-all strategy—there are several ways to set it up, each with its own pros, cons, and risks. The right approach depends on your financial goals, risk tolerance, and cash flow stability.
Some methods provide flexibility, while others require long-term commitment. Understanding the different ways to structure debt recycling is crucial to avoid mistakes and ensure it aligns with your circumstances.
⚠️ Disclaimer ⚠️
This content is for educational purposes only and does not constitute financial advice. The examples provided are hypothetical and based on assumptions. Your financial situation and results may differ. Debt recycling involves risks, including market volatility and changes in interest rates. This content does not recommend or promote any specific financial product or service. Always consult with a licensed financial advisor, tax professional, or mortgage broker to ensure this strategy aligns with your personal circumstances.
1. Loan Splits: Keeping Investment & Personal Debt Separate
What it is:
A home loan is split into two parts: one portion remains as a home loan (non-deductible debt), while the other is used for investment (tax-deductible debt).
This allows the interest on the investment loan to be tracked separately from your personal mortgage.
✅ Why people use it:
Keeps personal and investment loans separate, making tax tracking easier.
Simple to set up with most lenders.
Allows part of the home loan to be converted into deductible debt.
The converted portion often keeps the same interest rate as the home loan because it was originally a home loan before being repaid and redrawn for investment purposes.
⚠️ Things to consider:
Requires lender approval to create multiple loan splits.
May come with fees depending on the lender.
Loan repayments remain the same unless extra debt is added.
📌 Example: If someone has a $500,000 home loan and wants to debt recycle $100,000, they would split the loan into $400,000 and $100,000. The $400,000 loan remains as a home loan. The $100,000 portion is fully paid off first (clearing the home loan), then redrawn. Once redrawn, it is considered a “new” loan by the ATO and used to invest in income-generating assets (such as shares or property). This changes the purpose of the loan from a home loan to an investment loan, allowing for potential tax deductions on interest.
2. Line of Credit (LOC): Borrow As You Go
What it is:
A flexible loan where you can borrow in increments and repay as needed, secured against your home equity.
You’re only required to pay interest on the amount borrowed.
✅ Why people use it:
Allows borrowing only what is needed, rather than taking out a lump sum.
Works well for those making ongoing investments (e.g., dollar-cost averaging into ETFs).
⚠️ Things to consider:
Higher interest rates than a standard home loan.
Requires discipline—since funds are available anytime, it’s easy to overspend.
Increasing debt means larger repayments.
📌 Example: Someone with a $300,000 home loan may set up a $50,000 LOC. They can borrow $10,000 at a time to invest, rather than taking out the full $50,000 immediately. This reduces the amount of interest paid in the short term but still requires proper tracking and repayment planning.
3. Equity Release: Unlocking Home Equity to Invest
What it is:
Refinancing a home loan to access built-up equity and using those funds for investment.
Often used for lump sum investing (e.g., buying shares or property in one go).
✅ Why people use it:
Ideal for lump sum investing.
Keeps personal and investment loans separate.
Can be used to fund additional property investments.
⚠️ Things to consider:
Refinancing costs (fees, potential interest rate changes).
Borrowing a lump sum means you need a clear investment plan.
Releasing equity increases debt, adding financial burden with additional repayments.
📌 Example: Someone with $300,000 remaining on their mortgage but a home valued at $600,000 may be able to release $100,000 in equity to invest in shares or another property. However, their total loan amount now increases to $400,000, which means higher monthly repayments.
4. Margin Loans: Borrowing Against Investments
What it is:
Instead of using home equity, this method involves borrowing against an existing investment portfolio to buy more shares or ETFs.
✅ Why people use it:
No need to involve a home loan or property.
Can accelerate portfolio growth through leverage.
⚠️ Things to consider:
High risk—if markets fall, you may face a margin call (requiring you to pay down the loan quickly). This could result in selling the asset at a loss.
Interest rates are often higher than home loans.
📌 Example: Someone with a $100,000 ETF portfolio may be able to borrow $50,000 using a margin loan. If the market rises, their portfolio grows at an accelerated rate. However, if the market drops below a certain limit, they may be forced to sell at a loss to meet margin requirements.
Which One is Best?
Debt recycling isn’t a one-size-fits-all strategy. Each method has trade-offs, and the right choice depends on:
✔️ Risk tolerance – Are you comfortable with debt and market fluctuations?
✔️ Financial goals – Are you focused on paying off your mortgage quickly or building wealth long-term?
✔️ Cash flow stability – Can you cover potential shortfalls if investments underperform?
Common considerations across all methods:
Debt increases financial risk—borrowed funds must be repaid regardless of market conditions.
Investments can fluctuate in value—returns are not guaranteed.
Tax deductions depend on correct structuring—mixing personal and investment use may disqualify benefits.
Consulting a financial adviser, mortgage broker, or tax professional is recommended before implementing any strategy.
Final Thoughts
Debt recycling is a strategy that can accelerate wealth-building while reducing non-deductible mortgage debt, but it comes with risks and complexities. Setting it up correctly requires understanding loan structures, tax rules, and investment risks. Without proper planning, it’s easy to make mistakes that could cost money in the long run.
Some key takeaways to consider:
It’s not for everyone – If market fluctuations, added debt, or long-term commitments cause stress, this strategy may not be suitable.
Proper structuring is crucial – The wrong loan setup could disqualify tax benefits.
Cash flow must be stable – Debt recycling involves financial obligations, even when investments underperform.
Professional advice matters – A mortgage broker, financial adviser, and tax accountant can help ensure compliance and optimise the strategy.
Debt recycling can be a powerful tool when done right, but it’s not a shortcut to wealth—it requires discipline, risk management, and long-term thinking.
So, What’s Next?
Next up, I’ll share my debt recycling journey —including my strategy, challenges, and the biggest lessons I’ve learned along the way. Stay tuned!
💬 Got a question about debt recycling? Drop it in the comments—I might include it in the FAQ chapter at the end of this series.
With love,
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⚠️ Disclaimer ⚠️
This content is for educational purposes only and does not constitute financial advice. The examples provided are hypothetical and based on assumptions. Your financial situation and results may differ. Debt recycling involves risks, including market volatility and changes in interest rates. This content does not recommend or promote any specific financial product or service. Always consult with a licensed financial advisor, tax professional, or mortgage broker to ensure this strategy aligns with your personal circumstances.