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Debt Recycling: A Practical Pathway to Build Wealth Beyond Your Mortgage

If you’re earning well, building equity in your home, and thinking seriously about creating wealth outside superannuation, you are at the stage where the structure of your debt and investments begins to matter. You want flexibility, you want control, and you want to make long‑term progress that isn’t dependent on waiting decades to access your super. Debt recycling can support those goals. It isn’t a loophole or an aggressive tax tactic. It’s a disciplined way to make your existing debt work harder for you while you steadily build an investment portfolio designed to compound over many years.

Why Consider Debt Recycling?

You’re already making regular mortgage repayments. You may even be contributing extra. The challenge is that your home loan interest isn’t tax deductible, and every dollar going to the mortgage is a dollar that can’t be invested.

Debt recycling helps you do both—pay down your home loan and invest at the same time—using a structure that improves your tax efficiency without increasing your day‑to‑day living costs.

This approach aligns well if you want:

• Wealth growing now, not only inside super
• Flexibility over when and how you use your money
• A disciplined long‑term strategy without lifestyle sacrifice

The Power of Long‑Term Compounding

Before considering any strategy involving investment debt, you need confidence that the underlying investment engine is capable of delivering long‑term real growth.

If you had invested $10,000 into the S&P 500 at the beginning of 2000 and reinvested all dividends, that investment would have grown to about $76,626 by the end of 2026, delivering a total return of 666%, or 8.15% per year over 26 years.

These figures highlight two important realities. Firstly, markets fluctuate heavily in the short term and losing your nerve over that period can have dramatic impacts on you overall returns. Secondly, over decades, investing in growth assets, such as the largest US listed companies, have historically rewarded patient investors who stay invested.

This compounding effect, returns on returns accumulating year after year, is the core reason debt recycling can be effective. By investing earlier instead of waiting until your mortgage is gone, you give compounding more time to work for you.

How Debt Recycling Works

The mechanics are straightforward, but the sequencing and structuring matter:

1. You continue reducing your home loan—ideally with extra repayments.
2. You establish a separate loan split specifically for investing. You would essentially have two loans under the same umbrella.
3. You increase your investment loan by the amount you have paid off your home loan.
4. You invest the borrowed funds into long‑term, diversified growth assets such as shares.
5. You direct investment income from your investments and tax savings back into your home loan.
6. You repeat the process gradually as your position allows.

Your total debt may not reduce immediately, but its composition improves: less non‑deductible debt, more deductible investment debt. Meanwhile, your investment portfolio begins compounding in the background.

The Potential Benefits of Debt Recycling

If you approach this strategy with discipline and patience, you may benefit from:

• Improved tax efficiency
• Earlier compounding of long‑term investments
• A faster reduction in your non‑deductible home loan
• Growing wealth outside superannuation
• More effective use of your surplus income

These are incremental gains that build over time, not overnight changes.

The Risks You Need to Consider

This is an investment strategy involving debt. It requires a clear understanding of the risks as adding leverage in the form of debt essentially amplifies risk in the short term.

• Markets will fall at times when your debt will not. You need to be comfortable with this and not get in the way of long term compounding.
• Structuring mistakes can undermine the tax benefits. No one wants to pay more to the tax man than they need to.
• You need adequate cash reserves and stable income to maintain ongoing debt repayments and avoid selling your long term investment portfolio.
• The strategy must be maintained over many years, not abandoned when markets wobble.

Debt recycling is only appropriate if you’re comfortable with investment volatility and committed to a long-term plan.

Is Debt Recycling Right for You?

You may find debt recycling appropriate if you:

• Have a home loan and reasonable equity
• Feel confident in your employment and cash flow
• Want to build a substantial investment portfolio, particularly outside the restrictions of super
• Have a 10‑plus‑year investment horizon
• Are comfortable taking on well‑structured investment debt
• Maintain a strong emergency buffer

It suits people who want long‑term direction rather than short‑term excitement.

Common Pitfalls to Avoid

Most issues arise from poor execution and not the strategy itself. Some of the common mistakes we see include mixing personal and investment borrowing that prevent you from maximising tax deductions, choosing speculative or inappropriate investments rather than a considered and well diversified portfolio and failing to reinvest distributions or tax benefits. These errors can contribute to an ineffective investment debt strategy that captures increased risks but does not optimise the investment or tax outcomes originally sought.

Why Professional Guidance Matters

This strategy sits at the intersection of lending, investment, and taxation. Each component impacts the others, and getting one element wrong can compromise the entire approach. Good advice helps with:

• Correct loan structuring
• Appropriate investment selection
• Cash flow planning
• Long‑term monitoring and adjustments

It’s not about complexity for its own sake—it’s about ensuring each moving part supports your broader financial goals. We recommend working with an integrated team of finance professionals that are aligned to your long term goals and can ensure your wealth building strategies are optimised.

If this is something that may align with your longer term wealth building strategies then please reach out to our team to organise an initial discussion with one of our financial planners.

You can contact our team on (08) 9301 2200 or via our contact page: https://www.mckinleyplowman.com.au/contact-us/

Please note the information provided within this article is general of nature and is not a personal advice recommendation. Prior to considering strategies discussed in this article we recommend you seek personal financial advice. Please be aware that, without the benefit of financial advice, you may be committing yourself to financial strategies or products that are not appropriate for your overall personal situation, needs and objectives.

written by:

Will Lyons

Will has over 20 years of industry experience, including a consultancy role in the UK advising corporate pension schemes. Specialising in advising high net worth individuals and families, Will delivers bespoke strategies across family office structuring, private foundations, retirement, and succession planning.

Combining a client-focused approach with a deep understanding of their needs, Will has helped clients to establish and build significant wealth across complex financial structures, whilst effectively managing risk.

Will is an Authorised Representative of Fortnum Private Wealth Ltd.