offset vs debt recycling
Australian mortgage strategy calculator

How to pay down my mortgage faster?

For most Australian households, the home loan is the largest single financial commitment of their lives. Shaving even one or two percent off the interest you pay over the life of the loan can mean tens of thousands of dollars back in your pocket. There are several ways to get ahead — extra repayments, refinancing to a sharper rate, rounding up your direct debits, and channelling bonuses or tax refunds straight at the principal. But for households with surplus cash to deploy, two strategies stand out as the most powerful: using an offset account, or debt recycling. They achieve the same end goal — getting your home paid off sooner — through very different mechanics.

Strategy 1

Offset

An offset account is a transaction or savings account linked to your home loan. The balance sitting in it is "offset" against your loan balance for the purposes of calculating interest. So if you owe $500,000 on your mortgage and you have $50,000 in your offset, the bank only charges you interest on $450,000.

Every dollar in the offset effectively earns you a return equal to your mortgage interest rate — and crucially, that return is tax-free, because you're avoiding an expense rather than earning income. The money stays fully accessible, you can withdraw it any time, and there's no investment risk. It's the simplest, safest way to make idle cash work harder.

Best when: you value flexibility, want zero risk, or expect to need the money in the medium term.

Strategy 2

Debt recycling

Debt recycling is a strategy that gradually converts your non-deductible home loan into tax-deductible investment debt. The mechanics: you use surplus cash to pay down a chunk of your home loan, then immediately redraw that same amount through a separate split and invest it in income-producing assets like shares, ETFs, or managed funds.

Because the redrawn money is borrowed for investment purposes, the interest on that portion becomes tax-deductible. Over time, you're whittling down your "bad" debt and replacing it with "good" debt that earns income, generates capital growth, and reduces your tax bill — all while the total loan balance stays roughly the same.

Best when: you're on a higher marginal tax rate, have a long time horizon, and are comfortable with investment risk.

How to set up debt recycling →

Compare the two strategies

A side-by-side comparison of how your money would actually perform under each approach — with the proposed 1 July 2027 CGT reform built in.

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Year one breakdown
Cumulative after-tax benefit — 10 years
Offset Debt recycling
Strategy guide

How to do debt recycling

The mechanics are straightforward — the real complexity is getting the loan structure right and choosing investments that satisfy the ATO's deductibility test. Here's how it works in practice.

  1. 1

    Set up a split loan

    Ask your lender to split your existing home loan into two facilities — one for your home (non-deductible) and one ringfenced for investment (deductible). Most banks do this for free or a small admin fee. The cleanliness of this split is non-negotiable: the ATO will reject your interest deductions if personal and investment debt get mixed.

  2. 2

    Pay down the investment split

    Use your savings or surplus cash to pay down the investment split — typically to zero or near zero. This creates available redraw capacity on a facility that's earmarked for investment use only.

  3. 3

    Redraw and invest — fast

    Immediately redraw the same amount from the investment split and use it to buy income-producing assets. Speed matters: leaving the money sitting in a transaction account creates a "purpose" question for the ATO. The redrawn funds should flow straight to the broker or settlement.

  4. 4

    Direct income back to the home loan

    Have all dividends, distributions and rental income flow into your home loan offset (or directly onto the principal). This accelerates the payoff of your non-deductible debt while the investment debt — which now produces tax-deductible interest — stays in place.

  5. 5

    Rinse and repeat

    As you accumulate more savings, repeat steps 2–4. Over years, you systematically convert non-deductible home debt into tax-deductible investment debt — and build a sizeable portfolio alongside paying off your home.

Income vs cost base — why both matter

For debt recycling to work, the ATO requires the borrowed money be used to produce assessable income. That's the legal hook making the interest deductible. But your total return from any investment comes from two distinct sources, each taxed differently:

Income
Dividends, distributions, rent

Received as cash each year and taxed at your marginal rate the year you receive it. This is what satisfies the ATO's deductibility test, and what gives you cash flow to throw at the home loan. Franked Australian dividends bring imputation credits that can sweeten the after-tax position.

Capital growth
Increase in the asset's value

Not taxed until you sell (the CGT event). Under current rules: 50% discount after 12 months. From 1 July 2027: CPI-indexed cost base, with a 30% minimum tax rate. The compounding growth — taxed years or decades later — is usually where most of the long-term wealth is built.

The best debt recycling assets balance both: enough income to satisfy the ATO and feed your home-loan payoff, plus meaningful capital growth for long-term returns with deferred and discounted tax treatment.

Asset classes worth considering

What you buy with the redrawn funds matters as much as the structure itself. These are the most common choices Australian debt-recyclers consider, ranked roughly by how popular they are for this strategy.

Australian shares & ETFs

Income: high Growth: moderate

Broad-market ASX ETFs (VAS, A200, IOZ) and blue-chip shares throw off regular fully-franked dividends, which is ideal for satisfying the ATO income test and providing real cash flow. Franking credits effectively boost your after-tax yield by ~30%.

Watch for: heavy concentration in banks and miners — the ASX is top-heavy.

Global & diversified ETFs

Income: moderate Growth: high

Global equity ETFs (VGS, IVV, IOO) and diversified all-in-one funds (DHHF, VDHG) offer better geographic diversification and historically stronger capital growth, with smaller income distributions — typically annually.

Watch for: low distribution yields on growth-heavy ETFs may invite ATO scrutiny if income is minimal. Check the prospectus.

Listed Investment Companies (LICs)

Income: high Growth: lower

LICs like AFI, ARG and WHF are designed for stable, smoothed dividend income — typically with full franking. They tend to underperform broad-market ETFs on total return but the income reliability suits the debt-recycling income test.

Watch for: management fees, NTA premium/discount fluctuations.

Residential investment property

Income: low–moderate Growth: variable

Rental properties produce regular income (typically 3–5% gross yield) and may attract depreciation deductions. Capital growth is location-dependent. Note: from 1 July 2027, negative gearing benefits will be quarantined to new builds.

Watch for: stamp duty, agent fees, vacancy risk, large single-asset concentration, illiquidity.

What to avoid

Assets with no income at all — gold, crypto, growth-only stocks with no dividends, collectibles — can compromise the deductibility of your interest, because the ATO can argue the loan wasn't taken out to produce assessable income. Pure speculation defeats the purpose too: a tax deduction is worthless if the underlying asset loses 40%.

Notes on the calculation

Offset account. Interest saved equals the mortgage rate times the amount in offset, entirely tax-free. No investment risk, instant liquidity.

Debt recycling. The borrowed amount earns investment income (taxed at your marginal rate) and capital growth (taxed at disposal). Loan interest on the borrowed portion is tax-deductible. The model assumes the loan stays interest-only at the original balance and income is not reinvested.

CGT reform (Budget 2026, effective 1 July 2027). For an asset held across the cutoff, gain is split by time apportionment. The pre-cutoff portion keeps the 50% discount. The post-cutoff portion uses a CPI-indexed cost base, taxed at your marginal rate or 30%, whichever is higher. Shares, ETFs, property and other capital assets are affected; superannuation and companies are not. Rules are not yet legislated.

This is a general comparison, not financial advice. It ignores transaction costs, brokerage, franking credits, Medicare levy, loan setup fees, and cash flow timing differences. Consult a licensed financial adviser and tax agent before implementing debt recycling.