Debt Recycling
Strategic Debt Structuring & Coordination
Beyond Rate Shopping: Strategic Debt for Wealth Creation
Most Australians refinance to save on interest rates. That's not wrong—but it's incomplete. If you're earning $110,000+ with equity in your property and investments on the horizon, your debt structure can either accelerate wealth creation or quietly cost you tens of thousands in lost tax deductions and compound growth.
Strategic debt planning involves structuring your borrowing to maximise tax deductions, align with your investment timeline, and coordinate with your superannuation contributions and overall wealth strategy. This is where financial planning and mortgage broking intersect—and where most people leave significant money on the table.
Debt Recycling: Converting "Bad Debt" into "Good Debt"
Debt recycling is the most powerful strategy available to property-owning Australians with taxable income above $110,000. It converts the interest in non-deductible home loan debt i.e. your mortgage into tax-deductible investment debt, potentially creating $10,000+ annually in additional interest cost tax deductions whilst accelerating both mortgage reduction and wealth creation.
How Debt Recycling Works
The mechanics are straightforward but must be structured correctly to satisfy ATO requirements:
Step 1: You make extra repayments on your home loan, building available equity.
Step 2: You redraw that equity (or refinance to access it) and invest in income-producing assets such as shares, managed funds, or investment property.
Step 3: The interest on the redrawn portion becomes tax-deductible because the borrowed funds are used for income-producing investments, not your private residence.
Step 4: Investment income, dividends, and your tax savings are directed back into your non-deductible home loan, accelerating the conversion process.
Step 5: Over time, your non-deductible mortgage shrinks whilst your tax-deductible investment debt grows, and your investment portfolio compounds.
We strongly recommend seeing a qualify professional to ensure this is structured correctly otherwise you risk losing your primary home CGT Exemption when you sell the property if this is done against your main home.
A Practical Example:
Consider a medical professional earning $250,000 annually with a $400,000 home loan and $200,000 equity. They redraw $100,000 to invest in a diversified share portfolio yielding 4% income plus growth. The interest on that $100,000 (approximately $6,500 at 6.5%) becomes tax-deductible, saving approximately $3,000 annually at their marginal tax rate.
Meanwhile, the investment generates income and capital growth, and they continue paying down the non-deductible home loan with the tax savings.
This isn't increasing total debt—it's restructuring existing debt for tax efficiency and wealth acceleration.
Strategic Refinancing Beyond Interest Rates
Refinancing isn't just about securing a lower rate. For high-income earners and property investors, strategic refinancing can involve:
Debt Consolidation with Structure: Consolidating high-interest personal debt into your home loan can reduce interest costs, but only if structured correctly. The consolidated debt should be in a separate loan split, paid down faster than the primary mortgage, and never accessed again through credit cards or personal loans.
Equity Release for Investment: Accessing equity to fund investment property deposits or share portfolios, structured as separate tax-deductible loan splits with clear purpose documentation.
Business vs Personal Debt Separation: Business owners often mix personal and business debt inefficiently. Strategic refinancing can separate these, maximising tax deductions and protecting personal assets.
Interest-Only vs Principal-and-Interest: For investment debt, interest-only periods can maximise cash flow and tax deductions during wealth accumulation phases, switching to principal-and-interest as you approach retirement.
Who Benefits from Strategic Debt Planning?
Property Investors
If you own investment properties or plan to acquire more, strategic debt structuring ensures every dollar of interest is tax-deductible, loan splits are optimised, and equity is accessed efficiently for portfolio expansion.
High-Income Earners ($140k+ Taxable Income)
Your marginal tax rate (37-45% plus Medicare Levy) means every dollar of deductible interest saves you 39-47 cents in tax including medicare levy. Debt recycling and strategic borrowing can save $10,000+ annually whilst building investment wealth.
Business Owners
Separating business debt from personal debt, structuring director’s loans correctly, and ensuring borrowing aligns with business cash flow and growth plans can significantly improve both tax efficiency and financial stability.
Pre-Retirees (Ages 50-60)
Eliminating non-deductible debt before retirement reduces financial stress and frees up cash flow for retirement income. Strategic refinancing or accelerated repayment plans can clear your mortgage years earlier without sacrificing wealth creation.
Young Families Building Wealth
Balancing mortgage reduction with wealth creation is critical in your 30s and 40s. Debt recycling allows you to reduce your home loan whilst building your investment portfolio and superannuation balance simultaneously.
Our Coordination Process: Strategy First, Implementation Second
Stage 1: Strategic Modelling
We analyse your current debt structure, taxable income, investment goals, risk tolerance, and existing assets. We model multiple debt scenarios: How much equity should you access? Which investments align with your strategy? What's the optimal loan structure? How does this integrate with your superannuation and tax planning?
Stage 2: Coordination with Mortgage Specialists
We work with your existing broker or introduce you to specialists in our trusted network who understand strategic debt structures (not just rate shopping). We provide them with the strategy and required loan architecture, ensuring implementation matches the modelled approach.
Stage 3: Integration with Your Overall Plan
Debt doesn't exist in isolation. We ensure your borrowing aligns with your investment timeline, superannuation contribution strategy, tax position, and long-term wealth objectives. As your circumstances change, we review and adjust your debt strategy accordingly.
Important Considerations and Risks
Strategic debt planning involves borrowing to invest, which carries inherent risks:
Market Risk: Investments can fall in value, especially short-term. Debt recycling requires a long-term investment horizon (typically 7-10+ years) to ride out market volatility.
Interest Rate Risk: Rising interest rates increase your repayments. Your strategy must be affordable even if rates increase by 2-3% from current levels.
Cash Flow Management: You must maintain the discipline to direct investment income and tax savings back into your non-deductible debt, not lifestyle spending.
ATO Compliance: Debt recycling must be structured correctly with clear purpose documentation, separate loan splits, and proper record-keeping to satisfy ATO requirements for interest deductibility.
Strategic debt planning isn't suitable for everyone. It works best for high-income earners with stable employment, adequate equity, strong cash flow management, and a long-term investment outlook.
Next Steps: Next Steps: Book Your Debt Strategy Session
During your strategy session, we'll review your current debt structure, model potential scenarios, and determine whether debt recycling or strategic refinancing aligns with your wealth objectives.
We'll provide you with clear analysis: how much you could save in tax, how this accelerates wealth creation, what risks apply to your situation, and whether the strategy is appropriate for your circumstances.
For professional, personal advice tailored to your circumstances, please reach out below.
At Summit Financial Planning, we excel in precise financial management tailored to your needs. Contact us today for expert assistance.
Summit Financial Planning ABN 28 856 289 615 is a Corporate Authorised Representative of Lifespan Financial Planning Pty Ltd AFSL No. 229892 ABN 23 065 921 735.
Jeremy Douglas is an Authorised Representative (ASIC NO. 001238064) of Lifespan Financial Planning AFSL No. 229892.
The purpose of this website is to provide general information only and the contents of this website do not purport to provide personal financial advice. Summit Financial Planning strongly recommends that investors consult a financial adviser prior to making any investment decision.
The contents of this website do not take into account the investment objectives, financial situation or particular needs of any person and should not be used as the basis for making any financial or other decisions.
The information is selective and may not be complete or accurate for your particular purposes and should not be construed as a recommendation to invest in any particular product, investment or security. The information provided on this website is given in good faith and is believed to be accurate at the time of compilation.
You should obtain a copy of the PDS and Target Market Determination relating to the product and consider it before making any decision to acquire the product.
The information on this site, including the site source code is the property of Summit Financial Planning and is subject to Copyright © 2025. Unauthorised use of the information on this website is not permitted. Copyright in the information contained in this site subsists under the Copyright Act 1968 (Cth) and, through international treaties, the laws of many other countries. It is owned by Summit Financial Planning unless otherwise stated. All rights reserved. You may download a single copy of this document and, where necessary for its use as a reference, make a single hard copy. Except as permitted under the Copyright Act 1968 (Cth) or other applicable laws, no part of this publication may be otherwise reproduced, adapted, performed in public or transmitted in any form by any process without the specific written consent of Summit Financial Planning.