Debt recycling with blue chip shares as a wealth building strategy

Swapping bad debt, that is not tax deductible, for good debt, which is deductible, can generate huge financial gains, especially when combined with blue chip share investment.

By Matt Heron, Tax Planning Division Manager, Australasian Taxation Services

| 29-5-2025 | Tax | 3 min read

The average wage earner will pay more than $1 million in tax in their lifetime but restructuring debt and investment portfolios can reduce that burden significantly. (Image source: Shutterstock.com)

If you’re an Australian homeowner looking to build wealth using your family home, debt recycling might be the strategy that has been missing from your toolkit.

It’s a powerful way to turn your non-deductible home loan (the loan on your main residence) into tax-deductible investment debt. This strategy can help you reduce your home loan faster or generate additional income — especially when focused on stable Australian blue-chip shares that pay fully franked dividends.

What is debt recycling?

Debt recycling is a financial strategy where non-deductible debt, like a mortgage, is replaced with deductible debt, typically for investments. It is a relatively straightforward wealth-building strategy that works like this:

Pay down your home loan faster: Regularly make extra repayments on your mortgage, building up equity faster.
Redraw that equity to invest: Instead of letting that equity sit idle, you borrow against it (using a loan split) and invest in Australian blue-chip shares.
Use investment income to pay down your loan: Reinvest dividends or use them, along with any capital gains, to reduce your home loan faster. (If selling shares, ensure you hold them for at least 12 months to benefit from the 50 per cent CGT discount.)
Redraw in larger amounts: As your home loan balance reduces, you can redraw larger amounts (every 1-2 years), turning more of your non-deductible home loan into tax-deductible investment debt.
Claim tax deductions: Because the redraw loan is used for investment, the interest on this investment loan is tax-deductible.

How debt recycling grows your wealth faster

Debt recycling accelerates your wealth because it allows you to:

Build a larger investment over time: Each time you pay down your home loan and redraw, you can invest a larger amount.
Shift debt from personal to investment: Your non-deductible home loan shrinks, while your tax-deductible investment loan grows.
Maximise tax benefits: The interest on your investment loan is tax-deductible, reducing your overall tax bill.

Example: How it works

You have a $400,000 home loan at 5 per cent interest. Over time, you pay down $100,000 faster than required, creating available equity.
Instead of letting that equity sit idle, you redraw $100,000 (secured by your home) and invest in Australian blue-chip shares.
These shares generate $6,000 in fully franked dividends (a 6 per cent dividend yield).
The franking credits boost this to $8,571 in gross income, while the loan interest cost is $5,000.
You use the dividends (and any capital gains) to pay down your home loan faster.
After a few years, you pay down an additional $50,000 and sell your investments (ideally at a profit).
After allowing for tax on any capital gain, you repay the $100,000 investment loan and redraw $150,000 as a new investment loan. (Increase the loan split or have two loans of $100,000 and $50,000)
This cycle continues, with your non-deductible home loan shrinking and your tax-deductible investment loan growing over time.

Why franking credits matter

Franking credits are a tax benefit attached to fully franked dividends. For every dollar in dividends you receive, the company has already paid 30 per cent tax. You can claim this as a tax credit, which can:

reduce your tax bill
increase your refund if your tax rate is lower than 30 per cent
boost the after-tax income from your investments.

The power of compounding: accelerating your wealth

Debt recycling works because it leverages two powerful financial principles:

Compounding growth: Your investments generate income, which you use to pay down private debt faster, allowing you to invest more with the compound growth generated.
Tax deductibility: As more of your private debt becomes investment debt, you gain greater tax deductions on the investment debt interest.

Is debt recycling right for you?

Debt recycling can be a suitable strategy if you:

Want to build wealth over time using your family home loan.
Have a stable income and can manage extra investment loan repayments between dividend payments. (Invest in shares that have different dividend cycles so they spread out to four payment cycles over a year to more easily manage cash flow)
Are comfortable investing in Australian blue-chip shares.
Understand that share prices can fluctuate, and timing of a sale may need to be flexible if the market drops.
Are committed to using dividends and capital gains to pay down your principal home loan faster.
Aim to eventually replace your non-deductible home loan with a tax-deductible investment loan.

Once your private home loan is fully paid off, the dividends and capital gains from your investments can be used for general living expenses like rates, taxes, insurance, or even holidays. Your home could effectively become self-funding.

Ready to explore debt recycling?

Debt recycling can be a powerful tool for building wealth, but it must be done correctly. Before you dive in, speak with a qualified tax or financial planner who can help you structure your loans for maximum tax efficiency, avoid common tax traps and ensure compliance.