Debt Recycling Calculator: Model the Numbers Before You Commit

Model three things: what the deduction on your investment interest is actually worth, how the investment could grow, and how all of that compares with just paying the loan down. It is a modelling tool, not a recommendation. The numbers are only as good as the assumptions you put in.

Your details

Amount you would recycleThe slice of home loan you pay down, then redraw through a separate split to invest.

Home loan interest rate

Your salaryBefore tax. Used to price the deduction against the real brackets, not a flat rate.

Expected total returnIncome plus growth, per year, before tax.

Of which dividendsThe income part. The rest is capital growth.

Dividends that are franked

Years

Private hospital coverWithout it, the Medicare levy surcharge can apply and changes what the deduction is worth.

Against simply paying down the loan

+$48,288

Return you need to break even

4.5%

Tax saved over the period

$24,180

After CGT if you sold

+$38,923

Over 10 years, recycling $100,000 leaves you $48,288 better off than if you had simply paid that amount off the loan and left it there.

Your investments need to return 4.5% a year just to match paying down the loan. You have assumed 8%, so the gap above is what that extra return is worth. That break-even figure is the honest question here: it asks what you believe about markets, rather than what you typed into the box above.

How far ahead, year by year

Year 1Year 10

Ahead of paying the loan downBehind

Year by year

Year	Investment	Tax saved	Ahead by
1	$104,000	$2,418	$3,390
5	$121,665	$2,418	$19,936
10	$148,024	$2,418	$48,288

The headline counts capital growth you have not sold. The CGT tile shows what is left if you did sell at the end, with the 50% discount applied. Franking credits are modelled at the 30% company rate.

A model, not a plan. It assumes the split stays clean, the investment is held for the whole period, and your income continues. If any of those stop being true the numbers change, and the debt does not.

How to use this calculator

1. The slice of home loan you would pay down and then redraw through a separate split to invest, and what that loan currently costs you.
2. Your salary prices the deduction against the real brackets rather than a flat rate. Split the expected return between dividends and growth, since the two are taxed very differently.
3. The return you need to match simply paying down the loan is the number that answers whether this is worth it. The projected gain only answers what happens if your assumption comes true.

How debt recycling works

Debt recycling converts non-deductible home loan debt into deductible investment debt. That is the whole idea, and the mechanism is simple once it is laid out.

You make an extra repayment on the home loan, which reduces the principal. You then redraw that exact amount through a separate loan split and send it into an investment account to buy income-producing assets, usually shares or ETFs. The interest on that split becomes potentially deductible, because the ATO cares about the purpose the borrowed money is put to, not which account it sits in or what secures the loan.

That last point carries the whole strategy. Each split should buy one investment, once. If you ever use an investment split for something personal, even once, even small, you can taint the split and lose the deductibility of its interest. Keep investment money and personal money completely separate.

What this calculator is comparing

Most debt recycling calculators compare the strategy against doing nothing. This one compares it against paying down the loan with the same money, because that is the option you are actually giving up. Anyone with a spare $100,000 can simply erase $100,000 of debt, and a comparison that ignores it flatters the answer.

It also prices the deduction by running the whole tax calculation twice, with the deduction and without, rather than multiplying the interest by a marginal rate. An interest deduction is large enough to cross a bracket, drop you out of the Medicare levy surcharge, or move a HECS-HELP step, and a flat-rate shortcut misses all three.

The number worth reading first is the break-even return: what the investment has to earn each year just to match paying down the loan. It is the only output that asks what you believe about markets rather than repeating an assumption you typed in yourself.

Why a high tax rate helps less than you would think

The usual line is that debt recycling is a high-income strategy, because a higher marginal rate makes the deduction worth more. That is true, and it is only half the picture.

The same marginal rate also taxes the dividends the investment pays. Run the numbers on a portfolio yielding around 4% and the two effects very nearly cancel: the gap between someone on $45,000 and someone on $250,000 shrinks to almost nothing. Drop the yield and put the return into growth instead, and the gap opens up again, because growth is not taxed until you sell.

So the honest version is narrower than the usual claim. A high marginal rate helps most when what you buy is oriented towards growth rather than income. Move the dividend slider in the calculator and watch it happen.

The risks you take on

It does not reduce your total debt. This is the most common misunderstanding. Debt recycling changes the tax character of debt you already have. Your total borrowings stay the same, and borrowed money is now in markets.

Markets fall, the loan does not. If the portfolio drops 30% in year two, the split still owes the full amount and still charges interest.

If your income stops, the debt does not. Redundancy, illness or parental leave all put pressure on a strategy that assumes you keep servicing both purposes. The deduction is only worth something if there is taxable income to set it against.

Records matter more than the strategy. Mixed-purpose splits or a redraw used for personal spending can see deductions denied, with interest and penalties on top.

Before you touch anything

Check that your loan supports clean splits. Many do not. Some lenders will not allow multiple splits, some charge for each one, and some redraw facilities make purpose-tracing difficult. This is a question for a broker before you redraw anything, not after.

Set up the record-keeping on day one. The paper trail is the part people skip and the part the ATO cares about. For each split you want the date, the amount drawn, exactly what it bought, and the broker confirmation reference. Our free Debt Recycling Ledger is built for precisely that, one row per split, and comes with a free account.

Talk to an accountant about your own numbers. This tool sees what you type. Your real position depends on your whole income picture, other deductions, a spouse's income, and plenty this cannot know. If you want the background reading first, our explainer on how debt recycling works in Australia goes through it without the numbers.

FAQ

Is debt recycling legal in Australia?

Yes. It relies on the ordinary interest deductibility rules: interest on money borrowed to produce assessable income is potentially deductible. What the ATO scrutinises is the purpose of the borrowing and the quality of your records. The strategy is legal, and sloppy execution is where people come unstuck.

Does debt recycling reduce my total debt?

No, and this is the thing to understand before anything else. It changes the tax character of debt you already have, converting non-deductible home loan debt into potentially deductible investment debt. Your total borrowings are unchanged. The benefit comes from the deduction and the growth of what you bought, never from owing less.

What return do I need for debt recycling to be worth it?

That is exactly what the break-even figure in this calculator answers, and it depends on your loan rate and your tax position. As a rough shape: with a 6.2% loan and a salary around $140,000, the investment needs to return roughly 4.5% a year just to match paying the loan down. Below that line the strategy takes market risk to lose money.

Do I need a high income for debt recycling to make sense?

It helps, but less than is usually claimed. A higher marginal rate makes the deduction worth more and also taxes the dividends more, and on a portfolio yielding about 4% those two effects nearly cancel out. A high rate helps most when the investment is weighted towards growth rather than income, because growth is not taxed until you sell.

Can I use any home loan for debt recycling?

No. Many loans do not support the clean splits this needs. Some lenders do not offer multiple splits, some charge for each, and some redraw facilities make it hard to trace purpose. Speak to a mortgage broker before assuming your loan works. If it does not, refinancing has its own costs to weigh.

What records do I need to keep?

For every split: the date the funds were drawn, the exact amount, what the money bought, and evidence of the purchase such as a contract note or broker confirmation reference. Keep them for as long as the ATO requires for investment records. Our free Debt Recycling Ledger captures exactly these fields.

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