Should I reduce my loan and re-take money out

Hi all

One of the options I was presented with the amount of savings I have is to pay off my PPOR loan and re-take the money out as a separate loan or maybe a line of credit.

For example,

Let’s say I have a PPOR with 800K loan, and I have hypercritically speaking, 100K sitting in a separate offset account to offset the interest, so while I am on an 800K loan, but I am being charged interest based on 700K due to 100K setting in offset account.

So there are now 2 options. Suppose let’s say I found a 500K property that I want to invest in, and we are looking at 100K deposit (20%) and 400K loan (80%).

Option 1: Keep the 100K as cash in my PPOR offset account, and when the time comes, take the 100K out of my offset account and use that as deposit. In this case, my PPOR interest reverts back to 800K, and I pay interest based on 400K for investment. None of 800K in my PPOR is tax deductible and 400K of the investment is.

Option 2: pay off that 100K, so my PPOR loan becomes 700K. Then re-loan the 100K out as a separate loan (or a line of credit), and park the 100K there. This way, the interest generated by that 100K is 0 unless I actually use that 100K, and when I use up that 100K to pay the deposit of the 500K property, the interest generated by that 100K now becomes tax deducible against the investment property.

However, One thing to ask the experts:

if I pay off the 100K and re-take that out as a separate loan, would I be charged higher interest compare to the interest rate of my PPOR?

For example, currently my PPOR is on P&I rather than IO and the rate is 3.9%, so if I pay off the 100K and re-take it out as a separate loan for investment purpose, would the rate be higher than 3.9%?

Cheers
Steven