A calibrated model of debt recycling with interest costs and tax shields: viability under different fiscal regimes and jurisdictions

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Main Authors: von der Osten, Carlo, Aufiero, Sabrina, Vivo, Pierpaolo, Caccioli, Fabio, Bartolucci, Silvia
Format: Preprint
Published: 2025
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_version_ 1866909920141508608
author von der Osten, Carlo
Aufiero, Sabrina
Vivo, Pierpaolo
Caccioli, Fabio
Bartolucci, Silvia
author_facet von der Osten, Carlo
Aufiero, Sabrina
Vivo, Pierpaolo
Caccioli, Fabio
Bartolucci, Silvia
contents Debt recycling is a leveraged equity management strategy in which homeowners use accumulated home equity to finance investments, applying the resulting returns to accelerate mortgage repayment. We propose a novel framework to model equity and mortgage dynamics in presence of mortgage interest rates, borrowing costs on equity-backed credit lines, and tax shields arising from interest deductibility. The model is calibrated on three jurisdictions -- Australia, Germany, and Switzerland -- representing diverse interest rate environments and fiscal regimes. Results demonstrate that introducing positive interest rates without tax shields contracts success regions and lengthens repayment times, while tax shields partially reverse these effects by reducing effective borrowing costs and adding equity boosts from mortgage interest deductibility. Country-specific outcomes vary systematically, and rental properties consistently outperform owner-occupied housing due to mortgage interest deductibility provisions.
format Preprint
id arxiv_https___arxiv_org_abs_2511_18614
institution arXiv
publishDate 2025
record_format arxiv
spellingShingle A calibrated model of debt recycling with interest costs and tax shields: viability under different fiscal regimes and jurisdictions
von der Osten, Carlo
Aufiero, Sabrina
Vivo, Pierpaolo
Caccioli, Fabio
Bartolucci, Silvia
Risk Management
Statistical Mechanics
General Economics
Economics
Debt recycling is a leveraged equity management strategy in which homeowners use accumulated home equity to finance investments, applying the resulting returns to accelerate mortgage repayment. We propose a novel framework to model equity and mortgage dynamics in presence of mortgage interest rates, borrowing costs on equity-backed credit lines, and tax shields arising from interest deductibility. The model is calibrated on three jurisdictions -- Australia, Germany, and Switzerland -- representing diverse interest rate environments and fiscal regimes. Results demonstrate that introducing positive interest rates without tax shields contracts success regions and lengthens repayment times, while tax shields partially reverse these effects by reducing effective borrowing costs and adding equity boosts from mortgage interest deductibility. Country-specific outcomes vary systematically, and rental properties consistently outperform owner-occupied housing due to mortgage interest deductibility provisions.
title A calibrated model of debt recycling with interest costs and tax shields: viability under different fiscal regimes and jurisdictions
topic Risk Management
Statistical Mechanics
General Economics
Economics
url https://arxiv.org/abs/2511.18614