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

Paper: arXiv 2511.18614

Authors: Carlo von der Osten, Sabrina Aufiero, Pierpaolo Vivo, Fabio Caccioli, Silvia Bartolucci

Abstract

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.

Complexity vs Empirical Score

• Math Complexity: 6.5/10
• Empirical Rigor: 6.5/10
• Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper extends a discrete-time stochastic model of debt recycling by incorporating interest costs, leverage constraints, and country-specific tax shields. It offers solid analytical derivations alongside practical cross-jurisdictional calibration across Australia, Germany, and Switzerland.

Research Flowchart

  flowchart TD
    A["Research Goal: Assess Debt Recycling Viability<br/>across Jurisdictions & Fiscal Regimes"] --> B["Inputs: AU, DE, CH Data<br/>(Rates, Taxes, Home Types)"]
    B --> C["Dynamic Modeling of Equity, Mortgages,<br/>Interest Costs & Tax Shields"]
    C --> D["Calibration & Simulation<br/>(Owner-Occupied vs. Rental)"]
    D --> E["Findings: Positive Rates Shrink Success Region;<br/>Tax Shields Offset Drag"]
    D --> F["Findings: Rental Properties Outperform<br/>due to Interest Deductibility"]