How to Structure Your Loans for Maximum Tax Efficiency in a High-Interest Market

Using split loans, offset accounts, and redraw for tax-smart debt management

Why Loan Structure Matters More in High-Interest Markets

In a low-rate environment, many investors focus on speed and convenience over loan structure. But when interest rates rise, the way you set up your loans can have a significant impact on your bottom line and your long-term wealth-building strategy.

For property investors, structuring loans for tax efficiency is not just about cutting repayments—it’s about maximising the return on invested capital. Whether you own multiple properties or are managing both investment and owner-occupied debt, the right loan structure can be the difference between steadily compounding wealth and making avoidable mistakes.

This guide explores practical tools like split loans, offset accounts, and redraw facilities—and how to use them in a tax-effective way in today’s high-interest climate.

The Tax Fundamentals: What Makes Investment Debt Deductible

Before diving into strategy, let’s clarify the foundation of loan tax deductibility:

Interest on a loan is deductible only when the borrowed funds are used to generate assessable income.

In practice:

• Investment property loan interest is deductible.
• Owner-occupied home loan interest is not.

This makes it essential to keep deductible and non-deductible debt separate—and to pay down non-deductible debt as a priority. Poor structuring can easily mix these debts, reducing or even voiding tax deductions.

1. Interest-Only vs Principal & Interest: Managing Deductibility

In a high-interest market, the type of repayment matters. Many investors assume principal and interest (P&I) loans are the “safer” choice—but from a tax perspective, they are not always the most efficient.

Interest-only investment loans:

• Preserve cash flow, which can be used for new investments or a cash buffer.
• Keep repayments fully deductible, since you’re not reducing the principal.
• Allow you to direct surplus funds toward non-deductible home debt.

By contrast, P&I loans pay down the principal, which offers no tax benefit. For those juggling a mortgage and investment debt, it’s often smarter to prioritise reducing the home loan first.

2. Using Offset Accounts for Tax-Smart Liquidity

A 100% offset account is one of the most valuable tools in a high-interest market. It reduces the interest charged on your loan while keeping funds accessible.

For example, if you apply AUD 100,000 directly to your investment loan, withdrawing it later for personal use can jeopardise deductibility. But if you place it in an offset account, you:

• Reduce interest charges (as if the loan balance was lower).
• Maintain full deductibility on the original loan amount.
• Keep access to funds with no tax complications when withdrawing.

This is equally valuable for homeowners planning to convert their home into an investment property later.

3. Redraw Facilities and Their Hidden Tax Traps

Redraw facilities let you access extra repayments you’ve made into the loan—but they come with tax risks.

The problem:
If you make extra repayments on an investment loan and later redraw funds for personal use, that portion of the loan becomes non-deductible. Worse, you now have a mixed-purpose loan, making accounting complex.

Best practice:
Use redraw only if the funds will go back into income-producing purposes. For all other needs, an offset account is safer and cleaner.

4. The Role of Split Loans in Portfolio Strategy

Split loans divide borrowing across multiple accounts, often combining different repayment types or interest rates.

Advantages:

• Allocate part of the loan to interest-only with an offset for flexibility.
• Allocate another part to fixed rate for repayment certainty.
• Keep investment and owner-occupied loans clearly separate.

Splitting also allows you to target extra repayments toward non-deductible debt while leaving investment debt intact. Always check whether the offset feature applies to all splits—not all lenders allow it on fixed components.

5. Clearly Separating Owner-Occupied and Investment Debt

Mixing personal and investment debt in one loan is a common—and costly—mistake.

Avoid this by:

• Using separate loans for each purpose.
• Keeping meticulous records and labelling transactions clearly.
• Avoiding redraw or cross-use of funds between loans unless carefully structured.

For example, if you own a home and an investment property, each should have its own standalone loan account. Extra repayments should target the home loan, not the investment loan, unless you are following a debt recycling strategy.

6. Refinancing and Debt Recycling: Boosting Deductibility

Debt recycling is a strategy where you convert non-deductible home debt into deductible investment debt over time. Here’s how it typically works:

• Pay down the home loan using salary and rental income.
• Reborrow that amount in a separate split.
• Use the borrowed funds to invest in income-producing assets.
• Claim the interest on the new split as a tax deduction.

This can dramatically improve after-tax cash flow, especially in high-interest periods. However, it requires discipline, proper documentation, and a clear separation of funds.

7. Avoiding Common Structuring Mistakes

Many investors unintentionally reduce their tax efficiency due to:

• Combining personal and investment borrowings.
• Redrawing from investment loans for personal expenses.
• Paying off investment debt before non-deductible home debt.
• Locking up all loans in fixed rates without offset access.

These errors don’t just cost tax deductions—they limit your ability to scale and adapt your portfolio over time.

8. When to Involve Your Accountant and Mortgage Broker

Loan structuring isn’t a “set and forget” task.

Work with your accountant when:

• Planning a refinance or change in repayment type.
• Drawing funds or reinvesting equity.
• Selling or converting a property from personal to investment use.

Work with your broker when:

• Setting up split loans, offsets, or interest-only terms.
• Comparing lenders and products that fit your investment plan.
• Negotiating serviceability requirements for your strategy.

A coordinated approach between your accountant and broker will ensure your financing supports your tax and investment goals.

Case Study: Smart Structuring in Action

Investor profile:

• AUD 400,000 home loan balance.
• AUD 600,000 investment loan for rental property.
• AUD 150,000 salary, AUD 30,000 rental income.

Scenario A – Poor structuring:

• Mixed-use loan accounts.
• Redraws investment loan for personal expenses.
• No offsets or splits, P&I repayments on all loans.

Outcome:

• Lost tax deductions.
• Extra repayments wastefully applied to deductible debt.
• Tight cash flow.

Scenario B – Smart structuring:

• Separate loans for home and investment.
• Offset accounts on both.
• Investment loan on interest-only.
• Surplus funds directed to home loan offset.

Outcome:

• Full tax deductibility preserved.
• Faster reduction of non-deductible home loan.
• Flexible cash flow for future investing.

Final Takeaway

In a high-interest environment, every dollar saved and every deduction secured matters even more.

Key principles:

• Keep deductible and non-deductible debt separate.
• Use offset accounts to maintain liquidity without losing deductions.
• Avoid redraw traps that compromise tax efficiency.
• Regularly review your structure with both your broker and accountant.

Because in property investment, it’s not just what you buy—but how you finance it—that determines how fast you build wealth, how much tax you save, and how resilient your portfolio is through market shifts.