A common property strategy is to use equity in an existing home to fund the deposit or purchase costs for an investment property.
One of the first tax questions is usually:
If the new loan is secured against my home, can the interest still be deductible?
Potentially, yes. The property used as security for the loan is not, by itself, what determines the tax treatment.
The key issue is generally how the borrowed funds are used.
The purpose and use of the borrowing matters
Where borrowed money is used to acquire an income-producing investment, the interest may be deductible subject to the normal tax rules.
This means a loan secured against a private home can still have an income-producing purpose if the borrowed funds are used for an investment property.
Conversely, a loan secured against an investment property does not automatically produce deductible interest. If the borrowed money is used for a private purpose, such as a holiday, personal car or home renovation, the interest on that borrowing is generally private.
The security and the use of the funds are two different things.
Example: using home equity for an investment property deposit
Assume a homeowner refinances their principal residence and creates a separate $150,000 loan split.
The $150,000 is used directly for the deposit and acquisition costs of a new rental property.
The new split is secured against the homeowner’s residence, but the funds are traceable to the investment acquisition.
Subject to the particular facts and timing, the interest on that separate investment split may be deductible because of the income-producing use of the borrowed money.
The fact that the family home is the security does not, by itself, make the interest private.
Keep investment and private borrowings separate
One of the most important practical steps is to create a separate loan split for the investment borrowing.
Problems arise when a single loan is used for both private and investment purposes.
For example, if a borrower redraws $100,000 for an investment property and later redraws another $20,000 from the same loan for a private expense, the loan becomes mixed-purpose.
Interest then needs to be apportioned between the deductible and non-deductible components. Making repayments does not necessarily allow the borrower to simply choose to repay the private component first.
Mixed loans can therefore become difficult to administer over many years.
A clean loan split is usually much easier to trace and support.
Redraw and offset accounts are not the same
A redraw facility and an offset account can look similar from a cash-flow perspective, but they are different for tax purposes.
When you redraw from a loan, the redraw is generally treated as a new borrowing. The use of the redrawn money is therefore relevant in determining the interest treatment.
An offset account, by contrast, is a separate deposit account. Taking your own money out of an offset account does not change what the original loan was used for.
This distinction is important when restructuring debt or planning how to fund an investment.
Avoid unnecessary movement through personal accounts
Tracing is easier when the investment loan funds move directly to their intended investment purpose.
For example, a separate investment split might pay directly to:
- the solicitor’s or conveyancer’s trust account
- the vendor or settlement platform
- an account used solely for the investment acquisition.
If borrowed funds are first transferred into an everyday account containing salary and personal savings, and then used for multiple purposes, the tracing can become less clear.
Good records matter.
What about refinancing an existing investment loan?
Refinancing does not necessarily destroy the deductible character of an investment borrowing.
Where a new loan replaces an existing loan that was used for an income-producing purpose, the interest on the replacement borrowing may continue to have the same character, provided the connection can be demonstrated.
However, refinancing is a good time to review whether the existing loan has been affected by redraws, private use or mixed purposes.
A loan that started as fully deductible may no longer be fully deductible if later borrowings were used privately.
Common mistakes
We regularly see problems created by the following:
- assuming interest is deductible because the investment property is used as security
- assuming interest is not deductible because the family home is used as security
- using one loan split for both private and investment spending
- redrawing from an investment loan for private expenses
- moving borrowed funds through mixed personal accounts
- relying on the bank’s loan description rather than the actual use of the money
- refinancing without preserving records showing the purpose of the original borrowing.
The bank may call a facility an “investment loan”, but the tax outcome depends on the actual facts.
A practical approach
If you are planning to use equity to purchase an investment property, consider:
- creating a clearly identified separate loan split
- using the borrowed money only for the investment purpose
- transferring funds directly to the relevant investment transaction where practical
- keeping settlement statements, loan documents and bank records
- avoiding private redraws from the investment split
- obtaining advice before restructuring or mixing existing debt.
The objective is not simply to obtain a particular loan product. It is to maintain a clear connection between the borrowing and the income-producing investment.
If you are refinancing, drawing equity or purchasing another investment property, we can review the proposed loan flow before settlement and help identify potential interest-deductibility issues.