Mortgage Owner? How 'Debt Recycling' Turns Your Home Loan Into a Massive Tax Refund
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| Mortgage Owner? |
You have a $500,000 mortgage on your home. You pay thousands in interest every year, and the ATO gives you nothing back.
Meanwhile, property investors claim their mortgage interest as a tax deduction. Unfair? Maybe.
But there is a legal strategy called "Debt Recycling" that allows regular homeowners to convert their "Bad Debt" (non-deductible) into "Good Debt" (tax-deductible) without taking on more risk.
Good Debt vs. Bad Debt
To understand this strategy, you must know how the ATO views debt:
- Bad Debt: Money borrowed for private use (Your home, car, holiday). Interest is NOT tax-deductible.
- Good Debt: Money borrowed to buy income-producing assets (Shares, Investment Property). Interest IS tax-deductible.
The Goal: Switch your home loan (Bad) into an investment loan (Good) over time.
How Debt Recycling Works (Step-by-Step)
You don't just borrow more money. You "recycle" the equity you already have.
🔄 The Process (Crucial Rules)
- Pay Down: Use your savings (e.g., $20,000) to pay down a portion of your variable home loan.
- Redraw (Split): Ask the bank to "split" that $20,000 into a separate loan account. Do not skip this step.
- Transfer Directly: Redraw the $20,000 directly to your brokerage account. (Do not put it in your daily transaction account, or you "contaminate" the loan).
- Invest: Buy income-producing shares (e.g., ETFs like VAS or VGS) immediately.
- Claim Tax: The interest on that $20,000 loan is now 100% tax-deductible.
The Result: Free Money from the ATO
Why bother? Because it lowers your tax bill effectively. Here is the math based on 2026 tax brackets.
Let's say the interest rate is 6%. On a $100,000 recycled loan, your interest cost is $6,000/year.
- Scenario A (Salary $100k): Tax rate is 32% (incl. Medicare). Refund = $1,920 back.
- Scenario B (Salary $140k): Tax rate is 39% (incl. Medicare). Refund = $2,340 back.
- Bonus: The shares you bought also pay dividends (e.g., 4%), helping you pay the interest.
Debt Recycling vs. Margin Loan
This is NOT a Margin Loan. You are using your house as security, so:
- No Margin Calls: The bank won't force you to sell shares if the market drops, as long as you pay the mortgage.
- Lower Rates: You get home loan interest rates (e.g., 6%), which are much cheaper than margin loan rates (e.g., 8.5%+).
Risks to Watch Out For
| Risk | Explanation |
|---|---|
| Market Risk | If share prices drop, you still owe the debt. Only invest for the long term (7+ years). |
| Contamination | Crucial: Never mix investment cash with private cash. The loan split must be clean, or the ATO will deny the deduction. |
Chief Editor’s Verdict
Debt Recycling is the secret weapon of the wealthy.
If you have some savings and a mortgage, don't just pay off the house blindly. Talk to a mortgage broker about "splitting" your loan. It turns dead interest payments into tax refunds and a growing share portfolio.
Disclaimer: The information provided in this article is for general informational purposes only and does not constitute financial or tax advice. Debt recycling involves significant risks and strict ATO rules regarding the 'purpose test' and 'tracing' of funds. Incorrect implementation can lead to tax penalties. Please consult with a qualified financial adviser or tax accountant before attempting this strategy.
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