Back to Inspire Home

Debt recycling: what it is and how it works

There are many ways to grow your wealth and get closer to financial freedom. One such way is through debt recycling. Typically used by advanced investors, debt recycling is a way to turn non-deductible debt into tax-deductible debt, while producing an income.

Here we’ll explain what debt recycling is, how it works, the risks, benefits and who it is most suitable for.

What is debt recycling?

Debt recycling is a strategy that can be used to pay off debt that is not tax-deductible, such as a home loan, while simultaneously growing your wealth. Essentially, it can involve a homeowner using equity in an existing home to purchase some kind of investment asset. This asset could be an investment property, shares, or another asset aimed at creating long-term wealth.

Get a free property report in seconds

Search an address for price estimates and sales history.

Search a property

How does debt recycling work?

Debt recycling can be a complicated process, so if you’re not a seasoned investor, it’s a good idea to speak to a financial advisor before you get started. However, if you want to get a basic understanding of how debt recycling works, here are the general steps involved:

1. Access the equity in your home

To get started, you’ll need to have some equity built up in your property. The lower your loan to value ratio (LVR), the better. If your LVR is above 80%, it’s unlikely you’ll be able to tap into your equity without being charged Lenders Mortgage Insurance (LMI).

2. Borrow against your home

You can then borrow money against this house to start investing. To make the most gains, it’s smart to choose income producing assets, such as shares or an investment property that you can rent out.

3. Wait for the gains

After a little while, your investment will begin producing income which you can then use to pay off your home loan through extra repayments. This will increase your home equity, allowing you to borrow more money for investing purposes.

4. Embrace the cycle

As the cycle continues on, you will ideally end up with just the tax-deductible investment loan that you can focus on paying off. If it all goes to plan, you’ll be generating a passive income, while paying off your debts.

How much equity can you access?

$

Don't know your property value?
Get a free property report

$

Is debt recycling worth it?

For the right borrower, under the right circumstances, debt recycling can be very beneficial. It offers a way to build a solid investment portfolio while paying down the mortgage on your home.

Here are some of the main benefits of debt recycling:

  1. Save on tax: this strategy helps turn non-deductible debt (i.e. home loan repayments on a family home) into debt that comes with tax benefits (i.e. the interest on an investment loan).
  2. Exposure to growth assets: debt recycling can give you access to assets you may not have been able to afford without following this strategy.
  3. Passive income: if all goes to plan, you’ll end up generating a passive income through your investments.

Is debt recycling risky?

Debt recycling can present a number of risks and is not a strategy for an investor with a low risk appetite. Debt recycling is dependent on the performance of your investments and you can risk high financial stress.

To minimise the risk, it’s important to very carefully consider your whole financial situation. This means looking at your cash flow, expenses, existing debts and assets to ensure you will be able to make the most out of this strategy. Inexperienced investors should consider seeking assistance from a qualified financial advisor.

Here are some of the main risks of debt recycling:

  1. Poor performing investments: if your investment doesn’t perform well, you’ll have an investment loan to deal with and no returns to help you out.
  2. Taking on more debt: having more loan repayments can become overwhelming if not managed well. Missing repayments or defaulting can put your home at risk, leaving you open to losing everything.
  3. Shifting costs: the cost of this strategy will rise if interest rates increase. You also have to consider any fees associated with getting a new loan.

Is your interest rate this low?

Make sure you always have best home loan deal.

Compare rates today

Who is debt recycling most suited to?

Debt recycling is best suited to an experienced investor with a high risk tolerance. If you aren’t knowledgeable and confident when it comes to investing but are still interested in this strategy, you can speak to a financial advisor for expert advice.

Using debt to invest can amplify potential losses and gains. Additionally, this strategy operates best when you have at least a few years to see results. It’s also important to have a separate source of income outside of your investments in case things go wrong.

What could your home loan repayments look like?

Calculate your loan repayments

$
%
years

Got a home loan question? Just ask!

We're here to help. Get free expert advice at a time that suits you. Choose a time to chat with a Home Loan Specialist here

The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: home loan, interest rate, new purchase, extra repayments, investing, investment, investment loan, investment property, investment return, debt structure, equity, asset

Check today's low rates

Tell us what you are looking for and see if you can save.

Search rates

Check today's low rates

Tell us what you are looking for and see if you can save.

Search rates
Home loan repayment saver tool

Home loan repayment saver tool

Enter a few details about your home loan and see how much you could save on your repayments

Important legal stuff

Lendi is the trading name of Lendi Pty Ltd (ACN 611 161 856), a related body corporate of Auscred Services Pty Ltd (ACN 164 638 171, Australian Credit Licence 442372). We will never sell your email address to any third party or send you nasty spam, promise.
# Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
Lendi is a privately owned and operated Australian business. Our mission is to change the way Australians get home loans by providing a faster, smarter and more secure home loan experience designed around the customer’s convenience and needs. Although Lendi compares over 1600 products (2,500+ products including feature and pricing variations) from more than 35 lenders, we don't cover the whole market or compare all features and there may be other features or options available to you. While Lendi is 35% owned by founders and employees, we have also been supported by some great minority shareholders including Bailador, Macquarie Bank Ltd and a number of Australian sophisticated investors.
*WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rates are based on a loan amount of $150,000 over a loan term of 25 years. Fees and charges apply. All applications are subject to assessment and lender approval. Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
IMPORTANT INFORMATION: Loan terms of between 1 Year and 40 Years are available subject to lender and credit criteria. Maximum comparison rate will not exceed 14.99% (see comparison rate warning above). Any calculations or estimated savings do not constitute an offer of credit or a credit quote and are only an estimate of what you may be able to achieve based on the accuracy of the information provided. It doesn't take into account any product features or any applicable fees. Our lending criteria and the basis upon which we assess what you can afford may change at any time without notice. Savings shown are based on user inputted data and a loan term of 30 years. All applications for credit are subject to lender credit approval criteria.
Made with love at Circular Quay in Sydney, Australia. © 2021. All rights reserved.