For most people, debt feels like a weight to get rid of as quickly as possible. Paying off the mortgage or other personal debt is often seen as the ultimate financial goal. But there’s a strategy called debt recycling that flips the script: instead of just paying down debt, it aims to turn that process into a way of building wealth.

It’s powerful, but it’s also complex—bringing together debt management, investment choices, insurance, and financial planning. That’s why advice is crucial.

What Is Debt Recycling?

At its core, debt recycling is about transforming non-deductible debt into deductible debt while growing an investment portfolio at the same time.

  • Non-deductible debt is borrowing that doesn’t give you any tax benefits (like a home loan).
  • Deductible debt is borrowing used to invest in assets that can generate income (like shares or managed funds).

The idea is simple: instead of only directing spare money into paying down your home loan, you use that money in a way that also allows you to invest. Over time, you gradually reduce the non-deductible debt while creating an investment portfolio that works for you.

How It Works at a High Level

The process usually follows a cycle:

  1. Extra repayments reduce your non-deductible debt.
  2. You redraw or borrow against that repaid amount to invest in income-producing assets.
  3. The investment generates income (and may grow in value).
  4. That income, along with tax savings, is used to pay down more of the non-deductible debt.
  5. Repeat the cycle.

Over time, the goal is to reduce personal debt to zero while building a portfolio of investments that continues to grow.

The Benefits

The potential advantages of debt recycling include:

  • Faster reduction of home loan debt by recycling repayments into investments.
  • Building wealth sooner through exposure to growth assets.
  • Tax effectiveness since investment loan interest may be deductible.

In short, it’s about making your money do more than just sit in your home—it also works to build future income and wealth.

Where It Gets Complicated

While the idea is simple, the execution is not. Debt recycling requires careful planning and ongoing discipline. Challenges include:

  • Risk: Borrowing to invest amplifies both gains and losses. If markets fall, you still owe the loan.
  • Cash flow management: You need consistent income to service debt, cover living costs, and manage downturns.
  • Tax considerations: Structure matters. Get it wrong, and you may lose tax benefits or create extra liabilities.
  • Insurance needs: Taking on additional risk means protecting your income and family is even more important.
  • Discipline: The strategy only works if investment income and tax savings are put back into reducing debt, not spent elsewhere.

This is why it requires coordination across debt structuring, investments, and personal protection.

Who It Might Suit

Debt recycling tends to suit people who:

  • Have stable, reliable income.
  • Are comfortable with some investment risk.
  • Have a long-term horizon (usually a decade or more).
  • Can commit to a disciplined approach.

It’s not ideal for those close to retirement, those already stretched by debt, or those who can’t tolerate market ups and downs.

Why Professional Advice Matters

Debt recycling is one of those strategies that looks straightforward on paper but is highly technical in practice. It requires aligning:

  • Loan structures with the right lenders.
  • Investment strategies appropriate to risk tolerance.
  • Insurance cover to protect against unforeseen setbacks.
  • Tax rules to ensure compliance and maximise benefits.

Because it sits at the intersection of debt, investing, and personal protection, advice isn’t optional—it’s essential.

If this article has inspired you to think about your unique situation and, more importantly, what you and your family are going through right now, please get in touch with your advice professional.

This information does not consider any person’s objectives, financial situation, or needs. Before making a decision, you should consider whether it is appropriate in light of your particular objectives, financial situation, or needs.

(Feedsy Exclusive)

Disclaimer: The information contained in this article is general in nature and does not consider your personal objectives, financial situation or needs. Please consider whether the information is appropriate to your circumstance before acting on it and, where appropriate, seek professional advice.