Should You Borrow Against Your Home to Invest?

What is debt recycling?

For generations, standard financial advice in New Zealand has been as predictable as a rainy afternoon in Southland: get a good job, buy a house, and pay off the mortgage as fast as humanly possible.

We are taught to view debt as a burden, a heavy pack we must shed before we can truly enjoy our golden years. But what if the very thing you are rushing to kill, your mortgage, could be the engine that drives your long-term wealth?

What Is Debt Recycling? Understanding the Mechanics

At its core, debt recycling is the process of replacing non-tax deductible debt (your home loan) with deductible debt (an investment loan). In the eyes of the Inland Revenue Department (IRD), not all debt is created equal. In New Zealand, interest on loans used to invest generally remains deductible when the investment produces taxable income, subject to individual circumstances and tax rules.

• The interest you pay on your family home is generally not tax-deductible. In some ways, the mortgage on your home might be considered "bad debt" because you have purchased an asset, your home, which will cost you money in the form of council rates (“property tax”), insurance, and maintenance. All the while you will receive no income from owning the asset, unless you rent out a spare bedroom. Worst of all, the interest on your mortgage is not tax-deductible under the New Zealand tax code.
• Conversely, interest on money borrowed to purchase income-producing assets, such as shares or ETFs, is typically deductible. That means income earners will receive a tax refund on any interest paid. Of course, tax is a technical area, so everyone should take specific tax advice for their situation.

Debt recycling works with this in mind. You take extra cash flow or lump sums and repay down the non-deductible home loan. You then redraw that same amount through a separate investment loan facility to buy shares. Your total debt remains the same, but the portion of the debt that is tax-deductible increases. Over time, you "recycle" the entire mortgage until your home is essentially funded by a tax-deductible investment loan.

If your eyebrows already rose at this suggestion, good. Healthy scepticism keeps you financially secure!

Why Consider Debt Recycling? The Shares Versus Property Debate

New Zealanders tend to love property and dislike debt, except the mortgage kind. This emotional contradiction often leads to one outcome: throwing every spare dollar at the home loan, regardless of alternatives.

However, the costs of maintaining a rental property (rates, insurance, maintenance, and the occasional emergency 2:00am plumbing disaster) can quickly erode your yields.

Shares or managed funds and ETFs offer a level of liquidity and diversification that a single weatherboard house in the suburbs simply cannot match. You cannot sell the back bedroom of a rental property if you need $20,000 for a rainy day, for instance, but you can sell a portion of a share portfolio with the click of a button.

Furthermore, while property interest deductibility rules have been a political football recently, returning to 100% deductibility as of April 2025, shares have long enjoyed a more stable tax position. If the asset produces taxable income, the interest is deductible. This simplicity allows you to focus on the long-term growth of your assets rather than worrying about whether a change in government will move the goalposts on your rental portfolio.

The Power of Gearing: Why Borrowing to Invest Works

Borrowing to invest, or "gearing," allows you to control a larger pool of assets than you could with your own cash alone. If you have $100,000 and the market returns 10%, you make $10,000. If you borrow another $100,000 against your home and invest $200,000, that same 10% return nets you $20,000. Even after paying the interest on the loan, the "spread", or the difference between the investment return and the after-tax cost of the debt can significantly accelerate your net worth.

To make debt recycling work, your long-term expected return from the share market must comfortably exceed the after-tax cost of that debt.

For an investor on the 33% marginal tax rate, a 7% interest rate effectively costs about 4.7% after tax. Given the S&P 500 has historically returned an average of about 10% per year over the long term, the sums checks, that is to say the after-tax interest payment is less than the total investment return of the investment, but "historically" is a cold comfort when your portfolio is in the red for two or more years straight.

Of course, this is not a magic trick. It requires a disciplined approach and a long-term approach to the investment. As legendary billionaire Warren Buffett famously noted, leverage is one of the three ways smart people can go broke (the others being liquor and ladies, though he might have been showing his age with that particular trio). Buffett’s point is that leverage amplifies both gains and losses. If the market drops 20%, a geared portfolio drops much harder. Of course, this principle applies with property investment, too.

However, the key distinction with debt recycling is that your home loan is already there. You are not necessarily taking on more debt; you are simply changing the nature of the debt you already carry. It is a way of taking ownership of your financial destiny by using the tools already at your disposal.

What Are the Risks of Debt Recycling?

Debt recycling, or any form of borrowing to invest, is not for the faint of heart.

So, before you rush to the bank to redraw every cent of usable equity, you must understand the risks. Borrowing against your home to invest in the share market involves sequencing risk and interest rate risk.

If interest rates spike while the share market takes a tumble, you may find yourself in a position where the cost of the debt exceeds the dividends and share price growth you are receiving.

You also need a stomach for volatility. Investment markets do not move in a straight line. They zig, zag, and occasionally fall off a cliff. If you are the type of person who checks your share app every morning and loses sleep over a 2% dip, debt recycling might lead to more grey hairs than financial freedom.

Debt Recycling: Self-Reliance and the Professional Edge

While the concept is straightforward, the execution requires precision. Setting up the wrong type of loan or "polluting" your investment loan with personal spending can void your tax deductions entirely. This is why many successful investors choose to work with professionals who understand the nuances of the New Zealand financial system.

It is also why you will often hear the phrase "do your own research" in online forums. While that is excellent advice, doing your own research is often like performing your own dentistry: you might save some money upfront, but the long-term results could be painful and expensive. Professional competence in structuring these loans ensures that you stay on the right side of the IRD while maximising your wealth-building potential.

The Psychological Shift: From Debt-Free to Wealth-Rich

The hardest part of debt recycling is often psychological. We are conditioned to feel a sense of pride as our mortgage balance shrinks. Seeing that balance stay the same, or even grow, while your investment account increases requires a fundamental shift in mindset.

You must stop seeing your home as a piggy bank and start seeing it as a strategic asset. The goal might not be to have zero debt; the goal is to have the highest possible net worth. If you have a $500,000 mortgage and $1,000,000 in shares, you are significantly wealthier than someone with a paid-off $700,000 home and no investments. You’re also a lot more diversified and liquid, too.

The Bottom Line: Debt Recycling (Borrowing Against Your Home To Invest)

Borrowing against your home to invest in the share market or managed funds is a potent way to accelerate your path to financial independence. By using debt recycling, you can turn a stagnant liability, your home, into a productive, tax-efficient asset. It allows you to participate in the growth of the world's greatest companies while the tax system effectively subsidises your journey.

However, this is no "get rich quick" scheme. It is a long-term commitment to self-reliance and disciplined wealth management. This approach requires a clear understanding of risk, a robust loan structure, and the fortitude to stay the course when financial markets get choppy.

In the end, financial success is not about following the herd. It is about understanding the rules of the game and using them to your advantage. You can spend thirty years dutifully paying off a mortgage, or you can spend those same thirty years building a legacy. The choice, as always, is yours.

Your home already works hard. The question remains whether you want it working a little smarter too. Get in touch with our team for a complimentary initial chat to learn more.