Debt Recycling Calculator

How debt recycling works

A home loan used to buy your home is generally not tax deductible, because the interest relates to private use. Debt recycling changes the tax character of part of the debt without increasing the total amount you owe. Typically it happens in three steps:

1. Use spare cash to make an extra repayment on the non-deductible home loan.
2. Redraw or borrow the same amount through a separate loan split or investment loan.
3. Invest the borrowed money in income-producing assets, so the interest on that split may be deductible.

The total debt stays roughly the same. What changes is the split between private debt, whose interest is not deductible, and investment debt, whose interest may be. If your marginal rate is 32%, $6,000 of deductible interest produces a tax benefit of about $1,920, which reduces the effective cost of the loan.

Net benefit of recycling = portfolio value after CGT + cumulative tax benefit − recycled loan balance.

The comparison baseline is the offset account. If you did not recycle, the same cash could sit in an offset and save interest at the mortgage rate, tax-free. Recycling only adds value when the after-tax investment outcome plus the tax benefit beats that certain saving.

What makes the interest deductible

The ATO looks at the use of the borrowed funds, not at the security. A loan secured by your home can still be deductible if the money is used to buy an income-producing asset. Conversely, an investment loan is not deductible if the money is redirected to private expenses.

The cleanest structure keeps the investment borrowing in a separate loan account from the home loan. If the accounts are mixed, repayments and redraws can blur the purpose, and working out the deductible portion becomes difficult. A common mistake is to redraw from a home loan and spend the money privately, which can contaminate the deductible balance.

• Purpose test: the funds must be used to produce assessable income.
• Separate accounts: keeping investment debt separate makes the deduction easier to prove and maintain.
• Documentation: keep records of the transfer, the investment purchase and the interest charged.
• Mixed use: if only part of the money is invested, only that part of the interest is deductible.

Borrowing to invest also means you need to declare the investment income. Dividends, distributions and capital gains all form part of your taxable income, and the tax return calculator can help you see how that affects your overall position.

Reading the numbers

The calculator separates the pieces so you can see where the benefit comes from. The annual interest is the cost of the recycled debt. The tax benefit is that interest multiplied by your marginal rate, assuming the full amount is deductible. The portfolio value grows at the return you enter, and capital gains tax is deducted at the end using the 50% discount.

The recycling net gain adds the portfolio after tax and the cumulative tax benefits, then subtracts the loan balance still owing. That is the net wealth created by the strategy. The offset figure is the interest that the same cash would have saved, compounded at the mortgage rate. The difference between the two is the headline result.

A positive difference does not mean the strategy is right for you. It depends on the return assumption holding for the whole period, on staying invested through downturns, on the loan remaining deductible, and on your ability to service the debt if rates rise. Test a lower return and a shorter period to see how fragile the result is.

If you want the simpler comparison first, use the invest vs offset calculator. For the underlying investment growth, use the investment calculator.

Risks and limits

Debt recycling magnifies both gains and losses. The loan balance is fixed, but the investment can fall. A 30% market fall on a $100,000 portfolio is a $30,000 loss while the interest bill continues, and selling at that point to reduce debt would lock in the loss and may still leave a tax bill on other gains.

There is also a cash-flow risk. Deductible interest is still paid in full during the year; the tax benefit arrives later through your return or variation. If your income falls, the deduction is worth less and the loan is harder to service.

Finally, the strategy depends on the tax rules and on your personal circumstances. Deductibility can be affected by refinancing, redraws, offset accounts attached to the investment loan and changes in how the money is used. Keep the structure simple, document it, and review it with a professional.