Good debt and bad debt come down to tax. Here is how the Australian Taxation Office (ATO) decides, where your home loan sits and how the mix can change.
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In Australian tax terms, good debt is money borrowed to buy assets that earn income, so the interest is generally deductible. Bad debt is everything else: the interest is paid from after-tax income with nothing to offset it. For most households the largest bad debt is the home loan, and it can be converted.
The common definition says good debt buys something that grows in value. The tax definition is narrower and more useful: good debt is deductible, bad debt is not.
The Australian Taxation Office (ATO) allows a deduction for interest on money borrowed to buy shares, property or other investments that earn assessable income. Interest on money borrowed for private purposes, including the home you live in, is not deductible. This is the gap that debt recycling works with.
A loan secured against a rental property but used to buy your own home is still private debt. The ATO looks at where the money went. A loan used for both private and investment purposes has its interest apportioned for the life of the loan.
A simple good or bad label hides a wide spread. Three tiers are more accurate.
| Debt | Deductible | Tier |
|---|---|---|
| Credit cards, buy now pay later, payday loans | No | Costly: clear first |
| Car and personal loans | No, for private use | Non-deductible |
| Student loans (HELP) | No | Non-deductible, low cost |
| Home loan on the home you live in | No | Non-deductible |
| Loans used to buy shares, ETFs or a rental property | Generally yes | Deductible |
Both answers are right. Your home loan buys an asset that can grow in value and gives you somewhere to live, which is why many guides call it good debt. For tax purposes it is bad debt: none of the interest is deductible, and you repay it from income that has already been taxed.
That makes the home loan different from a credit card. You would not rush to eliminate it at any cost, but you would prefer as little of your total borrowing as possible to sit in that non-deductible column.
A deduction reduces the cost of interest by your marginal tax rate. The table uses a $100,000 loan at an assumed 6% and 2026-27 resident tax rates including the 2% Medicare levy.
| Type of debt | Annual interest | After-tax cost | Effective rate |
|---|---|---|---|
| Non-deductible | $6,000 | $6,000 | 6.00% |
| Deductible at 32% ($45,001 to $135,000) | $6,000 | $4,080 | 4.08% |
| Deductible at 39% ($135,001 to $190,000) | $6,000 | $3,660 | 3.66% |
| Deductible at 47% (over $190,000) | $6,000 | $3,180 | 3.18% |
Illustrative only. A deduction covers part of the interest, never all of it, and the investment still has to earn its keep.
You cannot relabel a home loan. The debt has to be repaid and borrowed again for a different purpose.
Total debt stays the same. The share that is deductible grows over time.
The deduction depends on a clean trail from the borrowing to the investment. That needs a separate split for each purpose, redraw paid straight to the investment account, and no private spending from the investment split. This is the work we do when we structure a debt recycling loan.
Your accountant confirms the tax treatment. Our guide on whether debt recycling is tax-deductible explains what they look for.
Card balances, buy now pay later and personal loans cost more than a home loan and offer no deduction. Paying them off is the first step, and Moneysmart suggests starting with the highest rate.
Deductible debt is still debt. It works against you when:
Moneysmart suggests testing whether you could still afford repayments if rates rose by two to four percentage points.
Two changes take effect from 1 July 2027 and affect how good debt performs.
Interest on money borrowed to buy shares and exchange-traded funds (ETFs) remains deductible against other income.
Three professionals cover three decisions. A financial adviser recommends whether to borrow to invest and what to buy. A registered tax agent confirms what is deductible. A mortgage broker arranges the lending and the split structure that keeps the two kinds of debt apart. Our page on working with a debt recycling broker sets out what that involves.
Good and bad debt come down to purpose and tax treatment. Clear the costly debts first, then look at how much of what remains is non-deductible. If most of it is your home loan, the question becomes whether part of it can be converted, and that starts with the loan structure.
We look at your current loan, equity and plans, then set out what a clean split structure would involve.
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Written and updated byAlex GeeDirector & Mortgage Broker, Kingfisher Finance Group
Reviewed byJessica MaraisMortgage & Finance Broker, Kingfisher Finance GroupGood debt funds assets that earn income, and the interest is generally tax-deductible. Bad debt funds private spending, and the interest is not deductible.
It buys a valuable asset, but for tax purposes it is bad debt because the interest on your own home is not deductible.
It is non-deductible, but it carries no interest and is indexed once a year, so it is usually the last debt to prioritise.
Not on the part used to buy the home you live in. A portion borrowed again and used for income-producing investments may be deductible.
By repaying part of your home loan and borrowing the same amount again, through a separate split, to invest. This is debt recycling.
No. The use of the borrowed money decides deductibility, not the security.
High-interest consumer debt, yes. Whether to keep paying down the home loan or to recycle it depends on your income, buffers and risk tolerance, which is a question for a financial adviser.
Use a hurdle-rate framework to explore when debt recycling may or may not be worthwhile, including borrowing costs, tax and investment returns.
Read more → GUIDEDebt recycling vs negative gearing: how they differ, what each aims to achieve and what the 2026 Budget changed for property investors.
Read more → GUIDEDebt recycling is powerful but it isn't for everyone. The situations where you should wait or walk away, from a licensed broker who says no when it doesn't fit.
Read more →
1. Arranged a loan when our small business situation made it difficult to qualify.
2. Met requirements to have funding available by a specified date.
3. Understood my needs to setup debt recycling to allow tax structuring.
4. Communicated well throughout.
I would use their services again.
Alex, Jess and the Kingfisher team were second to none and their process from start to finish was faultless. As a self-employed business owner, it can be difficult to obtain finance at the best of times. The Kingfisher team made this an easy and efficient proposition and their continued transparent and efficient communication ensured we were kept up to date at all times. Highly recommend them for your finance needs!
Alex and Jess dealt with our investment loan and provided a top tier service. They kept us up to date and communicated every step of the process making it a seamless and smooth experience! Awesome work team we will definitely be back for future loans!
Jess from Kingfisher was outstanding. I couldn't fault her communication, expertise or dedication to finding the best loan for our situation. The entire process was seamless from start to finish. We'll definitely be using Kingfisher again in the future. A top-tier organisation.
