Good Debt vs Bad Debt Strategy
Structuring your mortgages to maximize tax-deductible assets.
Core Assessment Analysis
The distinction between good debt and bad debt is meaningful in lending assessment, though not in the way it is sometimes presented in financial media. **From a lending perspective**, the relevant distinction is not about tax deductibility — lenders do not assess debt based on whether it is deductible. The distinction that matters to lenders is whether a debt is: - secured against an appreciating asset (property, shares) or against a depreciating asset (car, consumer goods) or unsecured entirely - productive in the sense of generating an income stream that offsets the cost of carrying it - creating a net negative on serviceability or a manageable one when assessed in combination with other commitments **How lenders assess debt interactions:** All existing debts are included in the serviceability calculation — credit cards (at the full limit, regardless of balance), personal loans, car loans, HECS/HELP debt, investment property loans, and any other committed liabilities. The structure of those debts (secured vs unsecured, long-term vs short-term, income-generating vs not) affects how much they reduce the borrower's assessed borrowing capacity. A large investment property portfolio with high debt but strong rental income produces a different serviceability outcome than the same debt level in personal loans — because the rental income partially offsets the debt cost in the calculation. A car loan produces no offsetting income at all. **Debt recycling as a strategy:** Debt recycling involves repaying non-deductible debt (typically a home loan) and then reborrowing that equity to invest in income-producing assets, aiming to convert the non-deductible home loan balance into deductible investment debt over time. This is a legitimate strategy in appropriate circumstances, but the tax and legal mechanics require professional advice — this page only covers the lending mechanics. **What matters for future borrowing capacity:** The structure and total level of existing debt significantly affects how much more a borrower can borrow. High-rate unsecured debt (personal loans, credit cards) creates the worst serviceability drag per dollar because there is no income offset and the repayments are high relative to the balance. Secured investment debt with offsetting rental income has a lower net serviceability impact.
Why Underwriters Focus Here
The type and structure of existing debt affects how much serviceability headroom remains for new lending. Lenders include all committed liabilities in the assessment calculation — not just the proposed new loan. High-cost unsecured debt creates a heavier serviceability drag than the same dollar amount in investment property debt, because investment debt can be partially offset by rental income in the calculation.
Key Outcome Assessment Factors
The total level of existing committed debt, the type of debt (secured vs unsecured, investment vs personal), the income generated by income-producing assets that carry debt, the repayment structure (principal-and-interest vs interest-only), and whether credit card limits have been reduced. All of these interact in the serviceability calculation.
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Debt recycling is subject to strict tax regulations. Seek professional accounting advice.
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