You know the saying “work smarter not harder”? Well the same principle applies to your money. Being strategic about how you save, invest and pay down debt could be the difference that helps you reach your financial goals 10 or even 20 years sooner (than your coworkers) 😉 

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With recent interest rate cuts (and more predicted to follow), now is the perfect time to consider how to optimise your financial strategy… so that your money works harder for you, not the other way around.  

If you have an owner-occupied mortgage, this debt is technically considered ‘good debt’. That’s because property has historically appreciated in value over time and you’re building equity in your home. But because this is your primary place of residence (PPOR), the interest you pay on this loan is not tax deductible. 

One way to turn your non-deductible mortgage into a tax-deductible loan is through a strategy called ✨debt recycling✨

Essentially, you can pay down your home loan, then reborrow that same amount to invest.

But why would you do that?

Whether interest is tax-deductible depends on what the borrowed money is used for.

Interest on your home loan isn’t tax-deductible. But if you borrow to invest in income-generating assets (like shares or property), that interest can be tax-deductible. Same total debt - but more of it is working in your favour.

Debt recycling in action 

Meet Rachel:

• She has a principal place of residence (PPOR) 
• Right now, her home loan amount is $500,000 and she has placed $100,000 in an offset account (which means interest is payable on only $400,000)

Rachel wants to start investing for her future. 

She has two main options for investing:

1. Take $100,000 out of her offset account and invest in the share market
   
2. Debt recycle the $100,000 by paying down her loan vby $100,000 using the money sitting in the offset account
   
   1. Split the loan into two parts:
      
      • Part 1: $400,000
      • Part 2: $100,000
   2. Recycle the $100,000 debt and invest this into property or the share market

💬 Debt recycling doesn’t mean additional debt

Rachel hasn’t taken on extra debt - she’s just shifted the loan structure and put that money into investments.

If she’d taken the $100,000 from her offset and invested it directly, the interest on her original home loan would still be non-deductible.

But by paying it onto the loan first, then borrowing it again for investment, she’s changed the purpose of that $100,000 - this is what makes the interest potentially deductible.

Additionally, she could use any dividends from her investments to make additional repayments on her home loan to pay down this debt faster. 

The catch 🫣 

Debt recycling can be really risky stuff because you’re essentially using your home as a security for your investment. Additionally:

🚫 Dividends and capital growth on your investment is not guaranteed, and you’ll still need to make repayments on your loan even if your investment isn’t performing well 

🚫 On a variable interest home loan your repayments could increase, which might put extra strain on your cashflow 

🚫 This strategy only works if you actually use your dividends on paying down your non-deductible debt, so you’ll need to be disciplined. 

Debt recycling can be a clever strategy to build wealth over time, but it needs to be done properly. If you're curious, it’s worth speaking to a mortgage broker and financial adviser to get it structured right.

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Flux Technologies Pty Ltd (ABN 86 634 507 172) is an authorised representative (Representative No. 525288) of Mozo Pty Ltd who is the holder of AFSL No. 328141. We also provide general advice on credit products under our own Australian Credit Licence No. 530103.

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