Debt Recycling vs Gearing: Why Michael Chose the Path Less Travelled
Michael is a 48-year-old IT contractor earning just over $300k a year. He came to me excited. He’d done his research online, spoken to a few mates, and was convinced that debt recycling was the smartest way to grow his wealth while reducing tax.
He’d even built a spreadsheet.
But as we worked through it together, it became clear that while debt recycling can be a useful tool, it’s not always the best fit, especially for high-income earners who are short on time and want real results without a high-maintenance strategy.
Here’s why Michael ended up choosing a more passive gearing strategy instead.
Debt Recycling vs Gearing—What’s the Difference?
Debt recycling involves using a high-income (high-yield) investment portfolio (often Aussie shares with franking credits) and channelling the income from those investments to pay down your non-deductible home loan. Every few months, you redraw that income and reinvest it, slowly turning bad debt into good debt.
It’s clever, but it’s also fiddly. You need to keep rebalancing every 3–6 months, and it only works well if you’re willing to actively manage it or have the right tools (and lenders) in place.
To make it work efficiently, you’ll often need to refinance to one of the few lenders that support this strategy without needing piles of paperwork every time you want to rebalance—which can sometimes mean accepting a higher interest rate. There’s also often more tax along the way due to the income-heavy focus.
Compare that to gearing—where you use your available cash or loan redraw to invest upfront in a diversified, professionally managed portfolio with a focus on long-term growth and auto reinvest the dividends. The debt is immediately tax-deductible, the income is lower (so there’s less tax), and it doesn’t require constant tweaking.
However, it’s important to understand that gearing isn’t a set-and-forget approach. It’s just lower maintenance than debt recycling. You still need the right support, structure, and regular check-ins.
In Michael’s case, we structured it so that his regular home loan repayments continued to reduce his non-deductible debt, while the geared loan stayed interest-only. This meant more of his money was going where it mattered most—paying down his home and building tax-effective wealth at the same time.
We’ll review and rebalance the strategy together every 12 months—considering whether to draw more from the home loan to continue building the portfolio, or leave things as they are.
These are the kinds of decisions we make together in our annual review process.
Why It Worked Better for Michael
Less work than debt recycling: Michael didn’t need to redraw and reinvest every few months.
More lender flexibility: Debt recycling requires specific loan products—not every bank is set up for it.
Lower income = lower tax: Since the portfolio was growth focused, Michael wasn’t hit with large taxable income every year.
Better diversification: Instead of being stuck in Aussie high-yield shares, we spread his portfolio globally—accessing growth sectors that historically outperform over the long term.
Simple exit strategy: Whether he sells down in retirement or uses his super to repay the debt, there’s a clear plan in place.
Gearing Isn’t for Everyone—And That’s Okay
Both gearing and debt recycling involve using debt to grow wealth—which can magnify gains, but also magnify losses. If your investment doesn’t perform the way you expect, or your income unexpectedly changes, the loan still needs to be repaid.
That’s why it’s not a one-size-fits-all approach.
To be a good fit for gearing, you need to feel comfortable taking on debt. And if you’re not quite there yet—that’s where I come in. I help clients understand the difference between good debt and bad debt, and how the wealthy use debt differently. If you're unsure, check out my other article: What Rich People Know About Debt That Most People Don’t.
And if I believe gearing or debt recycling isn’t the right fit for your goals or risk tolerance, we’ll explore other tools.
There are plenty of other smart ways to build wealth and secure your retirement without needing to take on investment debt - but 'good debt' with gearing can potentially supercharge your long term wealth.
The Bottom Line
Michael didn’t need a spreadsheet—he needed a plan that worked for his life. By choosing a lower-maintenance gearing strategy, he’s reducing tax, building long-term wealth, and staying focused on what matters—without the admin burden.
If you’ve been wondering whether gearing could work for you—or if you’ve outgrown your current strategy—let’s have a quick chat.