Debt Recycling Calculator
Model the potential benefits of converting your non-deductible home loan into tax-deductible investment debt. See projected tax savings, investment growth, and net equity over time.
Home Loan Details
Debt Recycling Strategy
Amount to convert from home loan to investment loan per year
Investment Assumptions
Tax Details
2024-25 Australian tax brackets - Stage 3 (excluding Medicare levy)
How Debt Recycling Works
Pay down your home loan with extra repayments
Redraw equity or take new loan split for investment
Invest in income-producing assets (shares, ETFs)
Claim tax deduction on investment loan interest
Important Considerations
- • Investment risk: Returns are not guaranteed. Markets can fall, reducing your investment value while debt remains.
- • Interest rates: Rising rates increase your costs and may affect cash flow.
- • Loan structure: Must keep investment and home loan splits separate for tax purposes (don't contaminate).
- • ATO compliance: Borrowed funds must be used for income-producing investments to claim deductions.
- • Professional advice: Consult a financial adviser and tax accountant before implementing this strategy.
Disclaimer: This calculator is for illustrative purposes only and does not constitute financial advice. Debt recycling is a complex strategy with significant risks. Investment values can fall and you may lose money. Past performance is not indicative of future results. Tax laws may change. Consult qualified financial and tax professionals before making any financial decisions.
What is Debt Recycling?
Debt recycling is a wealth-building strategy that converts "bad debt" (non-deductible home loan) into "good debt" (tax-deductible investment loan). The goal is to accelerate wealth creation by using tax deductions to reduce the after-tax cost of borrowing.
Non-Deductible Debt (Home Loan)
Interest on your home loan (owner-occupied) is NOT tax deductible. You pay with after-tax dollars.
Tax-Deductible Debt (Investment Loan)
Interest on loans used for income-producing investments (shares, ETFs) IS tax deductible against your income.
Example: How It Works
| Step | Action | Amount |
|---|---|---|
| 1 | Home loan balance | $500,000 |
| 2 | Make extra repayment | -$20,000 |
| 3 | New home loan balance | $480,000 |
| 4 | Set up new investment loan split | +$20,000 |
| 5 | Invest in shares/ETFs | $20,000 |
| 6 | Annual tax deduction (6.5% interest) | $1,300 |
| 7 | Tax saved (at 37% rate) | $481/year |
* Repeat process each year as you build equity. Tax savings compound over time.
Is Debt Recycling Right for You?
Good Candidates
- • Higher marginal tax rate (30%+)
- • Equity in your home (LVR under 80%)
- • Stable, reliable income
- • Long investment timeframe (10+ years)
- • Comfortable with investment volatility
- • Disciplined with finances
- • Understand the strategy fully
Not Suitable For
- • Low tax bracket (under 30%)
- • High existing LVR (over 80%)
- • Unstable or variable income
- • Short investment horizon
- • Risk-averse investors
- • Approaching retirement
- • Already stretched financially
Tax Deduction by Tax Bracket
On every $10,000 invested at 6.5% interest ($650/year interest):
| Tax Bracket | Income Range | Tax Saved | Effective Cost |
|---|---|---|---|
| 16% | $18,201 - $45,000 | $104/yr | 5.46% |
| 30% | $45,001 - $135,000 | $195/yr | 4.55% |
| 37% | $135,001 - $190,000 | $241/yr | 4.10% |
| 45% | $190,001+ | $293/yr | 3.58% |
* Based on 6.5% investment loan interest rate. 2024-25 tax brackets.
ATO Rules for Debt Recycling
- 1. Purpose test: Borrowed funds must be used to produce assessable income (dividends, rent). You cannot deduct interest on loans used for capital growth-only investments with no income.
- 2. No contamination: Keep investment and home loan splits completely separate. Never mix borrowed investment funds with personal spending.
- 3. Direct tracing: The ATO traces borrowed funds directly to their use. Draw investment loan directly into brokerage, not offset or personal accounts.
- 4. Records: Maintain detailed records of loan splits, investment purchases, and how borrowed funds were used.
- 5. Negative gearing: If investment interest exceeds dividend income, the loss can offset other income (wages).
Popular Investments for Debt Recycling
Australian Shares (ETFs)
- • VAS, A200, IOZ (ASX index)
- • Dividend yield: 3-5%
- • Fully franked dividends
- • Long-term growth potential
Listed Investment Companies
- • AFI, ARG, MLT, BKI
- • Dividend yield: 3-4%
- • Fully franked dividends
- • Low management fees
Diversified ETFs
- • VDHG, DHHF (growth)
- • Dividend yield: 2-3%
- • Global diversification
- • Automatic rebalancing
Note: Higher dividend yield investments provide more income to offset against interest costs. Franked dividends provide additional tax benefits through imputation credits.
Key Risks to Consider
Investment Risk
- • Markets can fall 20-50% in downturns
- • Debt remains regardless of investment value
- • May face margin call if LVR exceeds limit
- • Could end up worse off than doing nothing
Interest Rate Risk
- • Rising rates increase costs
- • May reduce or eliminate cash flow benefit
- • Variable rates can change quickly
- • May need to sell investments at loss
Structure Risk
- • Contaminating loan splits = lost deductions
- • Incorrect documentation = ATO issues
- • Mixing personal/investment funds
- • Redraw vs separate split differences
Behavioural Risk
- • Panic selling during market crashes
- • Lifestyle creep from tax refunds
- • Overconfidence in strategy
- • Not sticking to plan long-term