Hey everyone,
Just wanted to share something I wish I’d fully understood earlier — might help someone else avoid the same trap.
A few years back, I bought an investment property and was trying to be smart with my loan setup. My mortgage broker at the time suggested making extra repayments to reduce interest, and I did — I threw about $40k in over the years. No complaints there; it helped with cash flow.
Fast forward to now: I’ve just bought a home to live in, and figured I’d redraw some of those extra payments from the investment loan to help with fencing, landscaping, and other costs. Thought it was harmless since I was just accessing money I’d already paid in.
But here’s where I got caught out…
The ATO treats redraws differently than offset accounts. Even though it’s an “investment loan,” the purpose of the redrawn funds now becomes personal and suddenly, that portion of the loan is no longer tax-deductible. So now I’m paying interest I can’t claim, all because I used the redraw for something unrelated to the investment.
I never really had that explained clearly by the broker. No mention of how redraw affects the tax side, just general advice about flexibility and paying down the loan.
It’s frustrating because I thought I was doing the responsible thing, and it might’ve been better (tax-wise) to keep that money in an offset instead.
So now I’m wondering, Did your mortgage broker explain the tax implications of redraw vs offset? Or did you learn the hard way like I did?
Would love to hear how others structured their loans or if anyone else ran into this.
Cheers!
Thanks for your post. Here’s an example to flesh out the learning:
Investment property $1m
Loan @ 60%: $600k
Advance repayments: $50k (paid off loan, not offset)
Current loan balance: $550kRedraw $50k for personal
New loan balance: $600kUnder the example above, $550k would be deductible, whereas $50k would not.
The main point is this:
To determine deductibility:
1/ The money must be borrowed and not withdrawn from an offset account; (unless the money was transferred out of the mortgage to the offset to make a payment); and
2/ The money is used for investment purposes.The asset used as security is irrelevant. Some people think because it is a loan over an investment property, it will always be deductible. Not so.
Bye,
– Steve
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
And further to my last email, to provide more clarity, imagine:
Sam has a $500,000 mortgage on his home.
Scenario 1 – Sam has a mortgage offset account that has $200,000 in it. Sam uses that $200,000 to finance the purchase of an investment property. Is the interest deductible?
No – the money in the offset account is savings, so using it for investment purposes is not borrowing. Because the initial loan is for private purposes, the interest will not be deductible.
Scenario 2 – Sam has a line of credit against the mortgage. While the facility is $500,000, he currently owes, $300,000. Sam uses $200,000 of that facility to buy an investment property. Is the interest deductible?
Yes – the line of credit is a debt facility, so the borrowing for investment purposes would be deductible. However, Sam will need to apportion the interest between private and investment purposes according to the use of the funds.
Sam has a $500,000 mortgage on his investment property.
Scenario 1 – Sam has a mortgage offset account that has $200,000 in it. Sam uses that $200,000 to finance the purchase of another investment property. Is the interest deductible?
Yes – although the money in the offset account is savings, and using it for investment purposes is not borrowing as such, because the initial loan is for investment purposes, the interest will be deductible.
Scenario 2 – Sam has a line of credit against the mortgage. While the facility is $500,000, he currently owes, $300,000. Sam uses $200,000 of that facility to finance the purchase of an investment property. Is the interest deductible?
Yes – the line of credit is a debt facility, so the borrowing for investment purposes would be deductible. Sam would be wise though to keep track of what portion of the loan and interest relates to what property.
Scenario 3 – Sam has a line of credit against the mortgage. While the facility is $500,000, he currently owes, $300,000. Sam uses $50,000 of that facility to finance the purchase of a private car. Is the interest deductible?
No– the interest on the portion used for private purposes (i.e. interest on $50k) would not be deductive. However, the remainder of the interest (i.e. interest on $300k) would be as the loan was for investment purposes.
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This reply was modified 4 months ago by
Steve McKnight.
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi Steve,
Thanks for the clear explanation—your examples really helped clarify the common misconception that loan interest is always deductible just because the loan is secured against an investment property.
The key takeaway for me is that deductibility depends on how the borrowed funds are used, not where they’re borrowed from or what asset secures the loan. The redraw vs offset distinction was especially useful.
Appreciate you sharing your insights!
Brokers generally are not licenced to give tax advice so you can’t expect them to explain tax issues. Most run around saying ‘its the same thing’ and not understanding the tax issues. But it would be a good idea for them to suggest going to get tax advice before lodging the applciation.
Keep in mind too that a mortgage is different to a loan. It is the security for the loan. The borrower can be different from the mortgagor.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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This reply was modified 4 months ago by
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