Debt recycling may help you reduce your mortgage more quickly while growing your investments, but it’s not the right fit for everyone. Before you commit, it’s worth checking if your financial position, risk appetite, and loan structure are ready for it.
In this guide, Unconditional Finance walks you through a clear, actionable debt recycling checklist, explains the safeguards you may need (like insurance and buffers), and shows you how to keep your strategy compliant with the ATO.
Let’s break it down.
Are You Financially Ready to Start Debt Recycling?
Getting started with debt recycling means combining personal finance discipline with a clear mortgage strategy. It’s not just about having extra money. It’s about having the right structure, risk protections, and mindset in place.
This section walks you through a 10-point debt recycling readiness checklist to help you self-assess before moving forward.
The 10-Point Debt Recycling Checklist
Tick off what applies to your situation:
1. You have at least 20% equity in your property
Lenders typically prefer that borrowers have a loan-to-value ratio (LVR) of 80% or lower. This gives you flexibility to create loan splits and reduces the risk of LMI (lender’s mortgage insurance) if you refinance.
2. You can comfortably make extra repayments on your mortgage
Debt recycling only works if you’re already ahead of your loan. This ensures you’re creating equity to reborrow from.
3. Your income is stable
Whether you’re salaried or self-employed, a consistent income is key to managing both your home loan and the investment loan component.
4. You’re in a moderate to high tax bracket
Why does this matter? Interest on your investment loan may be tax-deductible, so the potential benefits increase with higher marginal tax rates (e.g. 32.5% or 37%).
5. You’re comfortable borrowing to invest
This strategy involves risk. You’re reborrowing and investing in income-producing assets like ETFs or property. Make sure your investment approach matches your tolerance for ups and downs.
6. You have a redraw or split loan facility
A suitable debt recycling structure requires the ability to reborrow against equity cleanly. Without split facilities, the risk of mixing personal and investment use increases.
7. You have a 3–6 month emergency fund
Before taking on any investment loan, you’ll need to protect yourself against unexpected costs like job loss or medical expenses.
8. You won’t panic during market volatility
Debt recycling relies on long-term compounding, not timing the market. Can you stay invested during downturns?
9. You’re financially disciplined
Avoiding lifestyle creep, keeping personal finances under control, and tracking your strategy matters here.
10. You’ve consulted a broker or financial adviser
Structuring matters. A mortgage broker can help tailor your setup to maximise benefits and avoid ATO issues.
Ticked at least 7? You may be ready to explore further. If not, no stress. Keep reading to build your foundations first.
Not sure how your current loan setup stacks up? Book a quick chat with Unconditional Finance and we’ll help you assess if your structure supports debt recycling, or what you might need to change.
When Debt Recycling May Not Be a Good Fit (Yet)
Not everyone is ready to start debt recycling today, and that’s okay. This strategy may not suit your current situation if:
- You’re living paycheque to paycheque
- You don’t yet have an emergency fund
- You’re highly uncomfortable with the idea of borrowing to invest
- You’re in a low tax bracket (under 19%), so tax benefits are limited
- You don’t understand how tax implications of debt recycling work
- You’re at risk of loan contamination because you mix personal and investment redraws
- You haven’t reviewed your loan features or can’t split your facility
Debt recycling suitability often improves over time. If you’re not ready now, this guide can help you prepare in a safe and sustainable way.
What Insurance Should You Have in Place First?
Before you start debt recycling in Australia, it’s important to protect the foundation of your strategy. That means not just your loan, but also your income and financial obligations. Because while you might be confident in your repayments now, unexpected life events can derail even the best-laid financial plans.
Debt recycling involves borrowing to invest, which means you’ll carry more debt for a time, even if that debt is working for you. That’s why having a personal safety net matters. A sudden loss of income can put pressure on both your home loan repayments and your investment commitments, potentially derailing your strategy.
Here are four types of debt recycling insurance to consider before you begin:
1. Income Protection Insurance
Income protection typically provides a portion of your regular earnings, often up to 70,% if illness or injury stops you from working. It’s especially valuable if your investment loan repayments rely on your ongoing salary. Even short periods off work can affect your ability to maintain your loan strategy. Income protection helps you stay on track without dipping into emergency funds or selling investments prematurely.
2. Life Insurance
If you were to pass away unexpectedly, life insurance helps your family cover your outstanding debts, including your mortgage and any investment loans tied to your debt recycling structure. This ensures your loved ones aren’t left with loan repayments they can’t manage and preserves any investments made under your name.
3. TPD Insurance (Total & Permanent Disability)
This cover provides a lump sum if a serious accident or medical condition leaves you permanently unable to return to work. It can be used to repay your home loan and investment debt entirely, removing ongoing financial pressure during an already difficult time.
4. Trauma Insurance
Unlike TPD, trauma cover is designed for temporary or serious illnesses, such as cancer, stroke, or heart disease. These conditions may not stop you from working permanently, but they can still affect your income for months or even years. A trauma payout can help cover living expenses or loan repayments while you recover.
Tip: Many Australians hold basic cover through their super fund, but it may not be tailored to your strategy. For example, income protection through super may come with longer wait periods or limited payout terms. It’s worth speaking to a broker or insurance adviser to check if your current cover is appropriate for your debt recycling strategy and lifestyle.
Need help reviewing your cover, or don’t know where to start? We can help you connect the dots between insurance and investment strategy.
Keeping Your Debt Recycling Strategy Compliant with the ATO
It’s not enough to structure your loan. You also need to keep it clean and traceable. The ATO requires that investment-related interest deductions are based on a clear, provable purpose. Without detailed records and separation, your tax benefits could be denied in the event of an audit. That’s why compliance isn’t just a back-office task. It’s central to keeping your strategy financially effective.
Let’s say you redraw from your investment split to cover school fees or a holiday. That entire loan portion may no longer be deductible.
How to Avoid Loan Contamination:
- Create a new split for each investment reborrow
- Only use that split for the specific investment purpose
- Never use redraw from investment splits for personal spending
- Use labels like “Shares – May 2024” in your online banking to stay organised
Track It Like a Pro: What the ATO Might Ask For
ATO compliance isn’t just about intent. It’s about proof. Keep detailed records to show that your interest deductions are legitimate. Track the following:
- Redraw the amount and which split it came from
- What you invested in (e.g. VDHG, managed fund, property deposit)
- Interest charged on each investment loan split
- Any income received from investments
- How investment income was used (e.g. reinvested, used to reduce the loan)
Tools like Excel, Notion, or even Google Sheets can help. Or speak with your accountant about how to integrate this into your year-end records.
Not Quite Ready? Here’s How to Build Your Foundation
If you’re not ready to start debt recycling today, that’s completely normal. Most people build towards it gradually.
Here’s how to strengthen your position:
- Grow your emergency fund to at least 3 months of expenses
- Refinance your loan to access split/redraw features
- Review your insurance cover inside and outside super
- Clear personal debts before adding investment borrowings
- Learn more about long-term investing, not just market timing.
Your financial setup doesn’t need to be perfect. It just needs to be stable, consistent, and forward-looking.
Get Clarity Before You Commit
Before you take action, make sure your strategy is structured, safeguarded, and trackable. This debt recycling checklist can help you avoid costly missteps and get on the path to smarter investing.
Recap:
- Tick off your readiness checklist
- Put your insurance and buffers in place
- Structure your loan properly and avoid contamination
- Track everything to stay ATO-compliant
And remember, this isn’t something you have to figure out alone.
Thinking about making the leap? Let’s make sure your foundations are in place. Schedule your free debt recycling review with Unconditional Finance today and get clear, expert guidance tailored to your goals.
Frequently Asked Questions (FAQs)
If your income is disrupted, your ability to keep making both your home loan and investment loan repayments may be affected. This could stall your debt recycling plan or force you to sell investments sooner than expected, potentially during a market downturn.
That’s why it’s important to have a safety net, such as income protection insurance and a buffer of savings, before you begin. If you’re in this situation, speak to your broker early. There may be ways to pause redraws or restructure your loan without undoing your progress.
Offset accounts can still play a role in your setup, but you’ll need to be careful. The key is keeping your personal and investment finances clearly separated. For example, using an offset account attached to your owner-occupied loan is fine, but drawing investment funds into that same account could result in loan contamination. Some borrowers use separate splits with no offset to keep things cleaner.
If you’re unsure, a mortgage broker or accountant can help you determine what’s suitable for your structure.
While many Australians use ETFs or managed funds because of their accessibility, debt recycling isn’t limited to shares. You could potentially invest in income-producing property or even diversified managed portfolios. The key requirement is that the investment is expected to generate income, such as dividends or rent.
This is what makes the interest on your investment loan potentially tax-deductible. That said, always consider your own risk profile and seek advice to make sure the investment strategy suits your goals.
Absolutely. It can. Many people assume they need hundreds of thousands to start, but getting started with debt recycling can be as simple as reborrowing $10,000 to $20,000. Even small amounts can build momentum over time, especially if you’re disciplined and reinvest regularly.
The main thing is that the setup is structured correctly from day one, so you don’t run into tax or compliance issues down the line. Starting small also lets you get comfortable with the strategy before scaling up.
You don’t have to reborrow monthly. Some borrowers prefer to make extra repayments for a few months, then reborrow in larger chunks when there’s enough equity built up. This can be more manageable, especially if you’re tracking your investments manually.
The choice depends on your loan features, comfort level, and how actively you want to manage your strategy. The key is to stay consistent, document everything clearly, and work with a broker who can help you find a rhythm that fits your situation.
