The recycled funds have to produce income to stay deductible, so the asset you choose matters. Here is how ETFs, LICs, direct shares, managed funds and property generally compare for a debt recycling strategy.
For debt recycling, the borrowed money generally needs to be used to buy an asset that produces assessable income, such as dividends or distributions, for the interest to be deductible. That is why most debt recycling strategies centre on income-producing shares and funds rather than assets that pay nothing. Broad ETFs, listed investment companies (LICs), direct shares, managed funds and property each have a different mix of income, franking, cost and diversification. This guide compares them in general terms. It is not a recommendation: your financial adviser recommends the assets for your circumstances, and we structure the lending around that choice.
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Debt recycling works by borrowing against your home equity to invest, then treating the interest on that borrowing as tax-deductible. The deduction is not automatic. As a general principle, interest is deductible when the borrowed money is used to produce assessable income, so the asset you buy with the recycled funds needs to have a genuine expectation of generating income such as dividends or distributions.
An asset that pays no income at all sits awkwardly in a debt recycling strategy, because the whole basis for claiming the interest is that the money is working to produce assessable income. This is why most debt recycling is built around income-producing shares and funds rather than, say, a non-income-producing collectable or a speculative holding that pays nothing. Whether a particular asset qualifies depends on your circumstances and current tax law, which is a question for a registered tax agent.
Beyond deductibility, a few practical traits tend to matter for recycling: reliable income you can redirect to your home loan, low ongoing cost, enough diversification to manage risk, and the ability to invest in tranches as you recycle over the years. The asset types below stack up differently against those traits.
Exchange-traded funds that track a broad market index are the most common default for debt recycling. A single broad ETF can hold hundreds or thousands of companies, which spreads risk widely, and they typically carry low ongoing management costs. They trade on the exchange like a share, so they are easy to buy in tranches as you recycle.
For recycling, the appeal is the combination of built-in diversification, low cost, regular distributions and simple record-keeping. Australian-share ETFs generally pass through franking credits attached to the dividends of the underlying companies, which can add to the after-tax income. Distributions can vary year to year and can include capital gains components, so the income is not perfectly smooth, and international ETFs may carry currency movement and different franking treatment.
A listed investment company is a company listed on the exchange whose business is holding a portfolio of investments. Like an ETF, buying one share of a LIC gives you exposure to a diversified pool. The structural difference is that a LIC is a company that pays dividends, rather than a trust that passes through distributions, and some older LICs have a history of paying relatively steady, fully franked dividends.
For a strategy that leans on predictable franked income to redirect at the home loan, that dividend profile can be attractive. The trade-offs are that LICs trade at a price that can sit above or below the value of their underlying assets, active LICs may charge higher fees than a broad index ETF, and dividend steadiness is a historical feature rather than a guarantee. As with any share, the choice of which LIC belongs with your adviser.
Buying individual company shares directly is also possible. Australian shares that pay franked dividends can produce tax-effective income, and holding shares directly gives you full control over exactly what you own and when you buy or sell.
The main caution with direct shares in a recycling strategy is concentration. A handful of individual holdings carries far more company-specific risk than a diversified fund, and because debt recycling is a leveraged, long-horizon strategy, a large loss in a single stock is felt more sharply. Direct shares also mean more decisions and more to track. Some investors hold a core of diversified funds and a smaller satellite of direct shares, but how much concentration is sensible is a question for your financial adviser.
Managed funds are professionally run pooled investments, similar in spirit to an ETF but usually bought and sold at a daily unit price rather than traded on the exchange throughout the day. They range from low-cost index funds to actively managed funds with higher fees, and they distribute income to unit holders in much the same way as an ETF.
For recycling, managed funds can offer diversification and, in the index-fund case, low cost, but active funds tend to cost more and distributions can include larger or less predictable capital gains components. Application and redemption processes are generally less immediate than trading a listed ETF, which matters a little when you are investing in tranches. The record-keeping is comparable to funds generally, provided the buying is done cleanly from the correct loan split.
Property can be the recycled asset, and it produces income through rent, but it behaves very differently from shares in a recycling context. It requires far more capital per purchase, so it is harder to invest in small tranches, and it comes with transaction costs, ongoing holding costs and much lower liquidity.
Property is also directly affected by the 2026 Budget change to negative gearing, which shares and funds are not. From 1 July 2027, negative gearing is restricted for established residential investment property bought after 7:30pm AEST on 12 May 2026, with exemptions for property held or under contract before budget night, eligible new-builds, and all non-residential assets including shares, ETFs and managed funds. That measure is announced and may change before it becomes law. Our debt recycling with an investment property page covers the property route in more detail, and the 2026 Budget guide works through the change.
We arrange and structure the debt recycling loan and coordinate with your adviser and accountant. A short call is the quickest way to see how it would work for you.
Book a free call →No single asset type is best for everyone. The table below sets out the general traits that tend to matter in a debt recycling strategy. It is a simplified comparison, not advice, and the right mix depends on your goals and risk tolerance.
| Asset type | Diversification | Typical cost | Income & franking | Recycling fit |
|---|---|---|---|---|
| Broad ETFs | High, built in | Generally low | Regular distributions, franking on Australian-share ETFs | Easy to buy in tranches, simple records |
| LICs | High, built in | Low to moderate | Often steady franked dividends, historically | Good income profile, watch price vs asset value |
| Direct shares | Low unless you hold many | Low per trade, more decisions | Franked dividends possible, less predictable | More control, more concentration risk |
| Managed funds | High, built in | Low (index) to higher (active) | Distributions, franking varies by fund | Diversified, less immediate to trade |
| Property | Low, single asset | High, plus holding costs | Rent, no franking | Hard to tranche, less liquid, budget change applies |
A common pattern is a core of broad, low-cost diversified funds for the bulk of the strategy, chosen for their income and simplicity, with any concentration in direct holdings kept deliberately small. Whether that pattern suits you is a matter for your adviser.
Choosing the asset is a financial advice decision, and it sits with you and your licensed financial adviser, not with a mortgage broker. What we do is separate and complementary: once the asset plan is set, we structure the lending so the borrowing is clean and the interest has the best chance of being deductible.
Whatever the asset, the deduction depends on the funds being borrowed and used cleanly for that income-producing purpose, with no mixing of private and investment money. A poorly structured loan can compromise the deduction regardless of how good the investment is. Our guides on whether debt recycling is tax-deductible and the redraw contamination trap explain why the structure matters as much as the asset.
A quick note on responsibilities: we arrange the lending and we do not recommend specific investments. Your financial adviser recommends the assets, your registered tax agent confirms the tax treatment for your circumstances, and we structure the loan around that plan. If you are leaning towards shares and ETFs, our debt recycling with shares and ETFs page covers how the loan is set up for that route.
No, but the asset generally needs to produce assessable income for the interest to be deductible. Shares, ETFs, LICs and managed funds are common because they pay income and are easy to buy in tranches. Property can also be used, though it needs far more capital and is affected by the 2026 Budget change. Your financial adviser recommends the asset for your situation.
Franking credits can improve the after-tax income from Australian shares and share-based funds, which is helpful because that income is redirected to your home loan. They are a benefit rather than a requirement, and how they apply depends on your circumstances. A registered tax agent can confirm the treatment for you.
No. We are mortgage brokers, so we arrange and structure the lending, not the investments. Choosing specific assets is a financial advice decision for you and your licensed financial adviser. Once the asset plan is set, we structure the loan so the borrowing is clean and the interest has the best chance of being deductible.
How we structure the loan for the share-based route.
Read more → GUIDEThe ATO purpose test and what keeps interest deductible.
Read more → STRATEGYThe property route, and what the 2026 Budget changed.
Read more →