Debt Recycling Strategy vs Borrowing For An Investment Property: Wealth Strategies Compared
- Jaxon King
- 3 hours ago
- 7 min read
For Australian investors looking to accelerate wealth creation, two of the most common approaches are debt recycling and investment property borrowing. Both can use leverage to build long-term wealth, but they differ in structure, tax treatment, cash flow impact, liquidity and risk. Understanding these differences is essential before deciding which option aligns with your financial goals.
In this guide, we’ll break down a debt recycling strategy vs borrowing for an investment property so you can make an informed decision and speak with a financial adviser about what suits your goals, time horizon and risk tolerance.
What Is A Debt Recycling Strategy?
Debt recycling is a strategy that uses the equity in your principal place of residence (PPOR) to invest in income-producing assets such as shares or managed funds, while gradually converting non-deductible home loan debt into tax-deductible investment debt.
Put simply, the goal is to reduce non-deductible debt faster while building an investment portfolio in a structured way.
How debt recycling works (step-by-step)
A debt recycling strategy typically involves:
Splitting your home loan so the investment portion is clearly separated from personal debt
Borrowing against home equity from the investment split (or a separate facility)
Investing those borrowed funds into income-producing assets
Directing investment income (distributions and dividends) and surplus cash flow to pay down the non-deductible home loan
Re-borrowing the repaid principal from the investment split to invest again
Repeating the cycle over time to progressively “recycle” the debt
Because interest deductibility depends on how borrowed funds are used, the structure and record-keeping need to be clean from day one.
This strategy appeals to investors seeking flexibility, diversification, liquidity, and long-term compounding returns.
What debt recycling is designed to achieve
A well-structured debt recycling strategy can appeal to investors who want:
A pathway to reduce non-deductible home loan debt
Diversification (rather than concentrating wealth in one property)
Liquidity (the ability to sell part of a portfolio if needed)
Flexibility to adjust the investment mix over time
The potential for long-term compounding returns
What Is Traditional Investment Property Borrowing?
Investment property borrowing involves taking out a dedicated investment mortgage to buy a rental property. The loan is secured against the property itself (and sometimes other assets), and the interest is generally fully tax-deductible because the borrowed funds are used to acquire an income-producing asset.
This strategy is popular among Australians due to the tangibility of property, potential negative gearing benefits and long-term capital growth.
Borrowing for an investment property and how the loan is structured
When borrowing for an investment property common factors include:
The required deposit and lender’s loan-to-value ratio (LVR) policies
Interest-only vs principal and interest repayments
Fixed or variable interest rates
Lender assessment of borrowing capacity, including buffers and household expenses
Whether a guarantor or additional security is used
Upfront and ongoing costs to factor in
Investment property borrowing tends to involve higher costs than debt recycling, including:
Upfront: deposit, stamp duty, legal fees, building/pest inspections
Ongoing: rates, insurance, maintenance, property management, vacancies
Potential additional costs: renovations, strata levies, landlord compliance
Debt Recycling vs Investment Property Borrowing: Key Differences
Let’s make a practical comparison of debt recycling strategy vs investment property borrowing across the factors most investors care about.
Structure and Loan Mechanics
Debt Recycling
Uses existing PPOR equity
Requires loan splits (or separate lending) to keep investment use traceable
Converts non-deductible PPOR debt into deductible investment debt
Offers the ability to invest gradually and adjust the investment mix at any time
Investment Property Borrowing
Requires a separate mortgage for the new property
No conversion of debt; the loan is fully deductible from day one
Investment is fixed to a single asset
Tax Benefits and Deductibility
Debt Recycling
Interest is tax-deductible if borrowed funds are used exclusively for investing
Helps reduce the effective cost of home loan repayments
Requires strict record-keeping to maintain tax compliance
Investment Property Borrowing
Interest, property expenses, and depreciation are deductible
May generate negative gearing benefits that can offset taxable income
Simpler from a tax-tracking perspective
Cash Flow Impact
Debt Recycling
Low upfront costs
Investment income may partially or fully cover interest
Usually creates mild positive or neutral cash flow depending on yield
Flexible investment contributions
Investment Property Borrowing
High upfront costs: deposit, stamp duty, legal fees
Ongoing costs: rates, insurance, maintenance, property management
Often results in negative cash flow in the early years
Cash flow pressure can be significant if interest rates rise or the property is vacant
Risk and Volatility
Debt Recycling
Your home is used as collateral for the investment split
For a plain-English overview of the risks of borrowing to invest, read ASIC MoneySmart’s guide: “Borrowing to invest: know the risks”
Investments are diversified across multiple assets
Higher short-term volatility due to share market exposure
Lower concentration risk
Investment Property Borrowing
Risk concentrated in a single property and location
Potential for tenant vacancies and unexpected repairs
Less price volatility, but higher leverage
Illiquid - properties take time and money to sell
Growth Potential and Liquidity
Debt Recycling
Investments can grow through compounding and reinvested distributions
Highly liquid: investors can sell part or all of the portfolio as needed
Offers flexibility to rebalance or reduce debt quickly
Investment Property Borrowing
Growth reliant on property values, which tend to increase steadily over time
Rental income can support long-term passive income objectives
Illiquid and expensive to exit due to agent fees and capital gains tax
Eligibility and Barriers to Entry
Debt Recycling
Low entry barrier, suitable for those with strong PPOR equity
Doesn’t require a large upfront cash deposit
Higher financial literacy required
Investment Property Borrowing
High entry barrier due to deposit and stamp duty
Stricter servicing requirements for large mortgages
Suited to investors with strong cash reserves and stable income
Which Strategy Suits Different Investors?
Debt Recycling Is Ideal For:
Homeowners with significant equity
Investors wanting to reduce non-deductible debt quickly
Those comfortable with share market volatility
People who want flexibility and diversified exposure
Investors seeking a lower-entry-cost strategy
Investment Property Borrowing Is Ideal For:
Investors with substantial savings for upfront costs
Long-term property-focused wealth builders
Those comfortable with higher leverage and cash flow variability
People who prefer tangible assets with potentially stable long-term growth
Common Mistakes to Avoid
Avoid mixed-purpose borrowing
For debt recycling, the most common issue is mixing personal and investment transactions within the same loan, redraw or offset. That can complicate interest deductibility and create record-keeping headaches. Clean loan splits and disciplined cash flow management matter.
Do not underestimate cash flow pressure
With investment property borrowing, investors often underestimate the true holding costs and the impact of rate rises, vacancies and repairs. A healthy cash buffer can make the difference between staying the course and being forced to sell at the wrong time.
Borrowing too aggressively
Leverage can accelerate outcomes, but it also increases downside risk. Whether you’re implementing debt recycling or borrowing for an investment property, stress testing your plan against higher rates and lower returns is essential.
Skipping strategy alignment
The best strategy is the one you can stick with. If volatility keeps you up at night, debt recycling into growth assets may feel uncomfortable. If you dislike ongoing maintenance and tenant management, investment property borrowing may not fit your lifestyle.
FAQs About Debt Recycling & Borrowing For An Investment Property
What is debt recycling?
Debt recycling is a strategy that uses home equity to invest in income-producing assets while progressively converting non-deductible home loan debt into deductible investment debt, provided the borrowed funds are used for investing.
Is a debt recycling strategy tax-deductible?
Interest may be tax-deductible if the borrowed funds are used exclusively to purchase income-producing investments and the loan structure supports clear tracking. Tax outcomes depend on your circumstances.
What does investment property borrowing mean?
Investment property borrowing refers to taking out a dedicated loan to purchase a rental property. Interest is generally tax-deductible because the loan is used to acquire an income-producing asset.
What should I consider before borrowing for an investment property?
Consider deposit and stamp duty, ongoing holding costs, vacancy risk, interest rate risk, borrowing capacity, and whether your cash flow can handle shortfalls.
Which is better, debt recycling or borrowing to buy an investment property?
It depends on your goals, risk tolerance, cash flow and preferences. Debt recycling can offer diversification and liquidity, while investment property borrowing concentrates risk in one asset but may suit property-focused investors.
Can you do debt recycling and also own an investment property?
Yes, some investors use both strategies at different times. The right mix depends on equity, borrowing capacity, cash flow buffers and your overall wealth plan.
Do I need advice before implementing debt recycling or investment property borrowing?
Both strategies can be complex and have long-term implications. Advice can help ensure your structure is compliant, tax-aware and aligned with your goals.
Final Thoughts: Which Is Better?
There is no one-size-fits-all answer. Both debt recycling and investment property borrowing can be powerful wealth creation strategies when implemented correctly.
The best approach depends on:
Your risk tolerance
Cash flow position
Equity and borrowing capacity
Investment preferences
Time horizon
Tax position
Before implementing either strategy, it’s essential to speak with a qualified financial adviser. The right advice ensures the structure is compliant, tax-effective, and aligned with your long-term financial plan.
Next step with Scion Private Wealth
At Scion Private Wealth, we help clients weigh up strategies like debt recycling strategy and borrowing for an investment property within a clear, goals-based plan. That includes stress testing, structuring, implementation support, and ongoing reviews so your investment management strategy stays aligned as markets and life change.
If you’d like to explore which approach suits your circumstances, book a call with our team to arrange a strategy discussion.
Disclaimer: This information is general in nature and does not constitute personal financial advice. It is not intended to influence any financial decisions. We recommend speaking with a licensed financial advisor to assess the suitability of any strategy for your personal circumstances.