The most tax-efficient way to structure property loans is to keep investment debt and personal debt completely separate, pay down your non-deductible home loan first, and hold spare cash in an offset rather than redraw. With home loan rates around 6.63% and investor rates around 6.89% in October 2026, every dollar of non-deductible debt costs more than it has for years. Structure matters even more for properties bought after 12 May 2026, because of the negative gearing limits starting in July 2027.
The basic rule: purpose decides deductibility
The ATO looks at what borrowed money is used for, not what property secures the loan. Interest on money borrowed to buy or improve a rental property is generally deductible against the property’s income. Interest on money used for your home, car or holidays isn’t, even if the loan is secured by an investment property.
That’s why mixing purposes in one loan causes problems: once a loan has both private and investment parts, you have to apportion the interest, and every repayment and redraw makes the split harder to track.
Pay down the right debt first
| $50,000 of spare cash | Interest saved a year | After-tax value at a 39% tax rate |
|---|---|---|
| In an offset against a 6.63% home loan | About $3,315 | $3,315 (home loan interest isn’t deductible) |
| In an offset against a 6.89% investment loan | About $3,445 | About $2,100 (you lose the deduction on that interest) |
Our calculations, using a 37% marginal rate plus the 2% Medicare levy. Rates are Canstar averages, as at 2 October 2026.
Even though the investment loan’s rate is higher, putting cash against the home loan is worth about $1,200 more a year after tax in this example. This is why many investors choose interest-only repayments on investment loans and direct everything else to the home loan.
Offset, not redraw
An offset keeps your savings in a separate account. The loan balance doesn’t change, so its purpose and deductibility stay intact. Redraw is different: money you redraw is treated as new borrowing for whatever you use it for. If you redraw from an investment loan for private spending, that part of the loan’s interest stops being deductible.
This matters most when you plan to move out of a home and rent it. If you’ve paid extra into the home loan, the balance is lower and so is your future deduction. Holding the cash in an offset instead keeps the loan balance, and the future deduction, intact.
Separate loans for separate purposes
- One loan per property. Avoid one big loan across several properties.
- A separate equity loan for deposits. When you use home equity for an investment deposit, set it up as its own loan so its purpose is clear.
- Use a split for different purposes, not just for fixed and variable portions.
- Avoid cross-securing. It’s a lender control issue rather than a tax issue, but it limits your options later. See the most common investor mistakes.
The 2027 changes
Legislation passed in June 2026 changes the tax maths for new purchases:
- Negative gearing. From 1 July 2027, losses on established residential property bought after 7.30 pm AEST on 12 May 2026 can only be offset against residential property income and gains. Excess losses carry forward. Properties held before then, and eligible new builds, keep the current rules.
- Capital gains tax. From 1 July 2027, the 50% CGT discount is replaced by an inflation-indexed cost base with a 30% minimum tax on gains from that date. Gains before then keep the discount. Estimate the effect with our CGT calculator.
- SMSF borrowing. Self-managed super funds can no longer take out new loans for residential property from 10 August 2026. See SMSF home loans.
For properties bought after 12 May 2026, a large interest bill no longer reduces tax on your wages from July 2027. That makes cash flow and the strategy for repaying debt more important than the deduction.
Debt recycling
Some homeowners gradually convert non-deductible home loan debt into deductible investment debt: they pay down the home loan, then borrow the same amount through a separate split to invest. Done properly, the total debt stays the same but more of it becomes deductible. It needs careful set-up and record-keeping, and it increases your investment risk. Get advice from a registered tax agent before you start.
Frequently asked questions
Is investment loan interest tax deductible?
Generally, yes, when the borrowed money was used to buy or improve a property that’s rented out or genuinely available for rent. From 1 July 2027, losses on established residential property bought after 12 May 2026 can only be offset against residential property income, not other income such as salary.
Why use an offset instead of redraw on an investment loan?
Because redraw counts as new borrowing for whatever you spend it on. Redrawing for private purposes makes part of the loan non-deductible. Money in an offset reduces interest without changing the loan balance, so the loan’s purpose and deductibility stay intact when you withdraw it.
Should I pay down my home loan or investment loan first?
Usually the home loan, because its interest isn’t tax deductible. In our example, $50,000 against a 6.63% home loan is worth about $3,315 a year, compared with about $2,100 after tax against a 6.89% investment loan. Your marginal tax rate and plans for the property can change the answer, so check with your accountant.
Sources
- Australian Taxation Office, Interest expenses on rental properties
- Australian Government, Negative Gearing and Capital Gains Tax Reform, Budget 2026-27
- Canstar, Average home loan interest rates, as at 2 October 2026
General information only. It does not consider your objectives, financial situation or needs and is not credit, tax or financial advice.