Debt Recycling Australia | Unlock Property Borrowing Power

By Guest Contributor William Xin, Director of XIN Mortgage

For many property investors, hitting a borrowing ceiling feels like the end of the road. You've built up equity, have strong income, and still — the banks say no. Sound familiar? The good news is, there’s a powerful yet underused strategy that can break this ceiling and help you keep growing your portfolio: debt recycling through smart structuring.

Let’s unpack how it works and why it might be the game-changer you've been looking for.

What is Debt Recycling?

Debt recycling Australia is a strategy that replaces non-deductible debt (like your home loan) with tax-deductible investment debt over time — usually through careful refinancing, investing, and structuring.

But this isn’t just about tax savings. When done right, debt recycling enhances your borrowing capacity, isolates liabilities, and helps make your financial structure more investment-friendly.

The Borrowing Wall: A Real Example

Let’s start with a real-life client case that illustrates the problem — and the breakthrough.

• Income: $200K household
• Assets: $1.5M owner-occupied property, $500K savings
• Liabilities: $900K home loan
• Goal: Buy an investment property and borrow as much as possible

Traditional approach:

With their existing $900K owner-occupied loan under personal name, most major banks only allowed them to borrow $250K, limiting them to a $700K property.

Strategic approach:

Using debt recycling principles and an SPV (Special Purpose Vehicle), we restructured the setup. The client ended up being able to borrow $1.1M, unlocking the opportunity to buy a $1.5M investment.

The Strategy Behind the Breakthrough

Here’s how it was done — step by step.

1. Create an SPV (Special Purpose Vehicle)

This could be as simple as a non-trading company.

2. Refinance Personal Debt into the SPV

Without changing the property ownership, we refinanced the existing $900K home loan from the individual’s name into the SPV. This removes the liability from the borrower’s personal environment.

Why does this matter? Because many banks can exclude SPV liabilities in your personal servicing calculation — freeing up your borrowing capacity.

3. Set Up a Lending Agreement

The SPV borrows funds from the lender and then lends them to the individual to repay their home loan. This arrangement may trigger Division 7A provisions, requiring a compliant loan agreement and regular repayments.

4. Self-Sufficient Cash Flow

The SPV is structured to be self-sufficient under the Division 7a loan repayment arrangement, so it doesn’t affect your personal servicing.

Why This Works

✔️ Removes personal liabilities from your borrowing assessment
✔️ Unlocks more lending options, especially with lender-specific policies
✔️ Enhances flexibility for future investment or asset protection planning

Variations of the Strategy

This isn’t one-size-fits-all. Here are some common implementation options:

• Refinance to SPV + Cash Out: Move current home loan to SPV, release equity
• Purchase in Individual Name, Borrow in SPV: Useful for joint strategies or exit planning
• Full SPV Strategy: Both purchase and borrow under the SPV structure

The right choice depends on your tax position, property strategy, and lender selection — this is where advice from a broker, accountant, and financial planner becomes critical.

Important Considerations

Before jumping in, keep in mind:

• Not all lenders accept SPV structures the same way
• Legal and financial advice is a must — especially with trusts
• Be prepared for a slightly more complex setup process
• Cash flow management is key — for both individual and SPV environments

But for investors serious about scaling their portfolio, the rewards can be well worth it.

Final Thoughts

Debt recycling is more than a tax strategy — it's a powerful tool to reshape your financial structure, regain borrowing power, and take your property investment journey further.

As property prices rise and lending policies tighten, smart structuring can be the difference between sitting still and moving forward.

If you feel like your borrowing journey has stalled, maybe it’s time to rethink the structure, not the goal.

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