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Debt Recycling in New Zealand

Updated 2 June 2025
​Introduction
  • When mortgage rates spiked above 7% in 2023, many New Zealand households focused on survival, not strategy. But by late 2024 / early 2025, floating and one-year fixed rates have drifted back down LINK, and the RBNZ has started to cut interest rates.
  • At the same time, the coalition government restored full mortgage-interest deductibility for residential rentals on April 1 202X LINK. For high-income earners, that single policy change turns the clock back: interest on debt used to earn rental or investment income can once again be written off against taxable income, capped only by general anti-avoidance rules.
  • That shift - combined with equity gains in housing since the 2020–22 boom—creates fertile ground for a strategy Australia has used for many decades but New Zealand has largely ignored: debt recycling.
  • At a high level, debt recycling can convert otherwise deadweight mortgage interest into a tax-efficient wealth-building engine, but only when executed with forensic record-keeping, conservative leverage and a cool head during market storms.
  • Get the structure wrong, and you'll forfeit deductions — or worse, magnify losses with borrowed money. Get it right, and the tax savings, compounded returns, and accelerated mortgage payoff can add six figures to your net worth over a decade. This is a very high-risk, high-reward strategy.
​To help explain what you need to know, our guide covers:
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​Important: This guide on debt recycling is for illustrative purposes only and is not a recommendation to do so. There may be nuances or varying applicability to your situation – this is purely to explain the mechanics of debt recycling. Note that debt recycling varies across countries and is less common in New Zealand than in Australia, for example.

What is Debt Recycling? A Plain-English Definition

The core idea is deceptively simple:
  1. You accelerate principal repayments on your non-deductible owner-occupier mortgage (e.g. your home mortgage), then immediately re-borrow the same amount and deploy it into income-producing assets whose interest costs are deductible.
  2. Over time, your household balance sheet morphs: the deadweight "bad debt" (debt with interest payments you can’t deduct) shrinks, the tax-advantaged (with tax deductible interest) "good debt" grows, and investment income helps pay the mortgage and the new loan.
  3. That combination of tax arbitrage and compounding appeal explains the sudden surge in the popularity of debt recycling. Yet the tactic is neither a silver bullet nor a one-size-fits-all fix — it lives at the intersection of mortgage structure, tax law, investment risk and personal cash-flow discipline.
  4. Traditional amortising mortgages drag you toward net zero debt by design; every fortnight, a slice of your payment chips away at the principal borrowing amount. Debt recycling keeps that discipline but redirects the equity you create.
 
For example, picture a $600,000 mortgage on your family home. You overpay an extra $1,500 at the mortgage each month, trimming the principal faster than scheduled. At the end of the quarter, you call the bank and increase (or redraw from) a linked revolving credit facility LINK by the exact $4,500 you just wiped off.
Those funds purchase income-producing assets — shares, PIE index funds, a rental deposit or REITs. Crucially, the two loan tranches must remain functionally separate for tax clarity: the home loan portion is non-deductible; the investment tranche is tax deductible. Over ten years, you aim for three outcomes:
  1. Interest-cost shift – the non-deductible portion gets smaller while the deductible portion grows.
  2. Tax offset – deductible interest reduces assessable income (e.g. from rents, dividends or FIF-calculated returns LINK) (subject to the usual 80 to 100% phase-in for rentals and ordinary deductibility rules for shares).
  3. Asset accumulation – the investments financed by recycled debt, hopefully, compounded above the post-tax interest rate, increasing wealth creation.

Therefore, the "recycling" label refers to the flow of debt rather than structure: money flows from income to mortgage, from home equity back into deductible debt, and from that debt into investments.

​Continuity and documentation are everything — the IRD explicitly allows interest deductions on borrowed funds used to acquire FIF interests, provided a clear audit trail exists. A messy commingled loan risks losing the deduction entirely. 

The Step-By-Step Guide to Doing Debt Recycling

​Every approach is different, but, generally, the following course of action applies:
  1. Restructure the mortgageSplit it into a large fixed-term mortgage balance (cheap rate, no redraw) and a smaller revolving credit LINK or offset LINK facility equal to one year’s planned principal pay-down — say $20,000. Westpac LINK and Kiwibank LINK, for example, describe revolving credit as a transactional overdraft secured by the home; interest is calculated daily on the net outstanding balance. Offset accounts achieve a similar effect by netting cash balances against the floating-rate loan.
  2. Automate extra repayments
    Set a weekly transfer from your salary account into the revolving credit portion. Every dollar parked there instantly lowers non-deductible interest because the facility is secured over the home.
  3. Redraw for investment
    Once a month (or quarter), redraw the principal you just repaid—but from a distinct sub-limit clearly labelled “Investment Loan.” Transfer those funds directly to your investment platform LINK, KiwiSaver (if self-employed and eligible), or rental settlement trust LINK to separate the paper trail.
  4. Invest sensibly
    You may want to choose a diversified, income-producing asset that fits your risk tolerance and matches or exceeds your effective after-tax interest cost. For many New Zealanders, that means a PIE global-equity index fund LINK at a low fee or a new-build rental property LINK.
  5. Track the two ledgers
    ​Maintain a spreadsheet that shows the home loan balance falling and the investment loan balance rising. At tax time, the interest line for the investment loan feeds into your rental or portfolio statement, but the home loan interest does not.
  6. Rebalance as required (e.g. annually)
    If share markets surge, periodically sell a slice to repay investment debt or diversify. If mortgage rates spike, slow down redraws until the spread again favours leverage.
  7. Document the intent
    ​    Keep bank statements, investment platform and investing brokerage confirmations and, if investing in foreign shares, evidence that the borrowings targeted income-producing assets. The IRD’s new Interpretation Statement IS 24/10 is explicit: loan purpose and traceability determine deductibility, not retrospective intent.
 
Important: The debt recycling strategy is highly dependent on the IRD’s tax framework (which changes periodically).
Generally, home loan interest (on primary residences/homes) is not deductible. Conversely, interest on money borrowed to derive taxable income is deductible under section DB 6 of the Income Tax Act 2007 LINK, subject to specific carve-outs. Three pillars matter for debt recyclers:
  1. Residential rental property – the restored deductibility timetable means 80% of interest is claimable in the 2024/25 tax year and 100% from 1 April 2025. The deduction offsets rental profit and can reduce other taxable income if that profit is negative.
  2. Share portfolios and PIE funds – The IRD's December 2024 interpretation statement confirms that interest on loans used to purchase FIF interests (including index funds) is deductible, provided you can show a direct nexus between the borrowing and the share acquisition. Because global-equity PIEs tax you on FDR income (5% of opening value) at a maximum 28% PIR, the interest deduction can create a tax loss that offsets other income—especially valuable for 33% and 39% taxpayers. More details can be found here: Tax Technical - Inland Revenue NZ
  3. Bright-line and intention tests – There are some notable exceptions. Flipping an investment property within the bright-line period generates taxable gains; share traders are assessed as being "in business" of share-dealing, paying tax on gains, but also gain full deductibility for interest and platform costs. Recyclers must, therefore, be consistent: a long-term buy-and-hold stance avoids unexpected reclassification as a trader.

When these pillars are combined with PIE capping, the effective after-tax cost of an investment loan can drop sharply. For example:
  • A 39% taxpayer pays 6.2% floating on a revolving facility.
  • Interest deduction at 39% reduces the out-of-pocket cost to 3.78%. If they invest in a Kernel Global 100 PIE LINK, returning a long-run 7% before tax and fee and taxed at a 28% PIR, the after-tax return is roughly 5.0%—leaving a positive 1.22% "carry" plus any capital appreciation above the FDR (Fair Dividend Rate) 5% inclusion.
  • That “spread” is the engine of debt recycling; however, it hinges on making positive investment returns - if it turns negative, the strategy stalls.

​Note: The above is illustrative only and does not include the actual financial figures. The calculations and rates may change or be incorrect.

Must-Know Debt Recycling Risks

Warning: There are significant execution risks associated with debt recycling, including:
  • Interest-rate risk – a 2% jump on a $250k investment loan costs an extra $5,000 yearly. Combat this by fixing part of the investment debt.
  • Market risk – the things you invest in (e.g. shares) can halve; property can stagnate; forced sale can crystallise losses. Try to maintain an emergency fund and insurance to avoid fire sales.
  • Legislative risk – interest deductibility has already swung once in four years. Future governments could re-tighten rules or cap deductions to investment income only. If this happens, the attractiveness of debt recycling can swing positive or negative depending on what the current government decides to do.
  • Tracing failure – commingling deductible and non-deductible borrowings/funds kills the deduction benefits. Set up discrete and separate facilities from day one.
  • Behavioural traps – it's too easy to redraw the money to invest in lifestyle spending. Automate transfers to the broker the same day you redraw to avoid the temptation.
  • DTI and LVR ceilings – from 1 July 2024, banks must observe RBNZ DTI caps; a chunky investment facility may push you over. Check eligibility before committing. 

Debt Recycling Mortgage Tools: Revolving Credit vs Offset vs Split-Loan vs Interest-Only

​The “funding side” of recycling lives entirely inside your mortgage structure. Most banks support three mechanics:
  1. Revolving Credit Facility (RCF) or Revolving Home Loan/Mortgage
    An RCF LINK functions like a giant overdraft account. Salary credits push the balance down daily, cutting non-deductible interest. You redraw this amount to buy assets, at which point that slice of the facility becomes deductible (but keep it as a sub-account).
  2. Offset Account/Loan An offset account LINK is a separate transaction account whose balances offset an equal chunk of the mortgage. Very clean for tracing because you transfer funds from the offset (non-deductible) to a distinct investment LOC (deductible). Kiwibank’s Offset Variable product is a common choice.
  3. Interest-Only Loans
    ​    Some investors elect to pay interest only on the investment LOC, freeing cash flow to pay down the home loan. Debt to Income (DTI) and Loan to Value (LVR) caps introduced by RBNZ in 2024 LINK can make approval trickier above 6× income for owner-occupiers and 7× for investors.
Know This: Selecting the right mix depends on income volatility, risk tolerance and your bank’s lending policy. Whichever path you pick, open separate accounts for deductible and non-deductible debt — a five-minute admin step that saves hours of forensic accounting analysis later.
​Debt Recycling – An Example:
From a mathematical perspective, debt recycling only makes sense if three conditions hold:
  1. The investment return beats the after-tax cost of debt;  and
  2. Interest remains deductible; and
  3. No major negative shock forces liquidation at a market trough.
To explain this better, let’s walk through an example to illustrate this. Assume a couple on a combined $240,000 salary (39% tax bracket) with a $600,000 mortgage at 6.2% floating mortgage. They can spare $2,000 a month above scheduled repayments.
  • Conventional (non-debt recycling) path – apply $2,000 directly to the principal. After ten years, the mortgage balance falls to about $295,000, and no outside investments are built.
  • Recycling path (debt recycling) path – pay the extra $2,000 into revolving credit, then redraw each quarter to invest in a PIE global-equity fund yielding 7% before tax/fee.
    • At the end of year one, there was a $24,000 principal reduction on the home, a $24,000 investment loan, and $24,000 in PIE units. An interest deduction of 39% lowers the effective cost of the $24k loan from $1,488 to $908. The PIE's after-tax return (28% PIR) nets ~$1,205, covering interest and leaving $297 to reinvest. Repeat annually.
    • By year 10, the mortgage principal has shrunk to ~$170,000, the investment loan has grown to c. $200,000, and the PIE portfolio (assuming constant 7^ returns) is worth ~$250,000. Net position versus the non-recycler is roughly $80,000 ahead, driven by debt recycling deductibility and return-interest spread.
Disclaimer: The above is illustrative only and does not include the actual financial figures. The calculations and rates may change or be incorrect.

Frequently Asked Questions

​Our list below is not exhaustive, and it’s not financial advice – it’s designed to help you understand debt recycling further and come to a decision that is right for you. 

I’m considering doing debt recycling. What assets are popular to invest in?

Generally, there are three main investing options when redrawing the free cash flow to invest:
  1. Rental property
    Historically, it was the go-to for New Zealand investors because interest was deductible, and leverage was straightforward. Restored deductibility revives its appeal, but bright-line LINK, Healthy Homes LINK, high capital expenditure and tenant risk all complicate this picture. Recyclers must ideally ensure the rental is cash-flow positive or at least neutral once rates, maintenance and property-management fees are included.
  2. Listed shares or ETFs
    The benefits are that they have very high liquidity, you can invest fractionally, and there are no tenant hassles. Under the FIF regime, most offshore ETFs are taxed on 5% of opening value; if total economic return averages 7–8%, only two-thirds are taxed, boosting after-tax yield. Interest deductibility offsets that FIF income dollar-for-dollar. Volatility is the downside: a 30% draw-down is entirely possible. Most publicly listed New Zealand and Australian stocks are exempt from FIF tax.
  3. PIE cash or bond funds
    For conservative recyclers, the goal may be pure tax-rate arbitrage rather than high return. Borrowing at 6% to invest in a Term PIE yielding 5% hardly works on pre-tax numbers, but for a 39% taxpayer, the PIE's 28% cap narrows the gap. Still, the margin is usually thin, so running the numbers is essential.

Diversification across two or three asset types cushions legislative or market shocks — no one wants to discover that their rental and share portfolios are underwater while their bank calls in floating-rate loans.
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Note: The above is illustrative only and does not include the actual financial figures. The calculations and rates may change or be incorrect.

Who should be doing debt recycling? Who should avoid it?

Ideal debt recycling candidates include:
  • A stable household income comfortably covers all fixed costs.
  • 10-year plus time horizon and capacity to ride volatility.
  • Comfort with moderate leverage and willingness to keep detailed records.
  • Marginal tax rate ≥ 33% LINK (the bigger the bracket differential, the larger the benefit).
Poor debt recycling candidates
  • First-home buyers need cash for renovations or a family arrival in two years.
  • Anyone that's already at debt service or DTI ceilings.
  • Investors whose risk tolerance evaporates in a 20% market correction.
  • The deductibility edge is minimal for borrowers on 10.5% PIR or low marginal tax rates.

10 Questions Before Trying to Undertake Debt Recycling

  1. Have you priced the after-tax spread? The effort may outweigh the reward if an investment returns minus post-deduction interest is < 1%.
  2. Is your mortgage split into clearly separate facilities? If not, restructure first.
  3. Can you document the purpose? Save every loan draw-down and broker contract note.
  4. What happens at 2% higher interest rates? Stress-test cash-flow.
  5. Does an emergency fund cover six months' interest and living costs?
  6. How will you handle investment losses? Pre-commit to rebalancing rules.
  7. Are you up to date on RWT, PIR and FIF obligations? If not, read IRD's IS 24/10 fact sheet ASAP.
  8. Does your bank allow unlimited revolving credit redraws without extra fees? Check facility T&Cs.
  9. Have you obtained tax advice? One hour with a CPA can cost less than a single deduction dispute.
  10. Is your partner on board (if applicable)? Financial strategies fail fastest when household buy-in is missing.