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Can You Unmix a Mixed Loan? Yes – And Here’s How

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We often tell clients that mixing loan purposes is a common and costly mistake. But what if the damage is already done? Fortunately, the ATO provides a way to fix the issue—by splitting the loan into separate parts for investment and personal use.

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Let’s walk through how to “unmix” a mixed-purpose loan and get your deductions back on track.

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What Is a Mixed Loan?

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A mixed loan is one that has been used for both personal and investment purposes. For example, if you take out a home loan to buy your residence, and later redraw part of it to fund an investment property or shares, your loan is now “mixed.”

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Why does this matter? Because the ATO requires interest deductions to be directly linked to income-producing activities. When a loan is mixed, it's hard to identify what portion of the interest applies to the investment, and what relates to personal use.

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The Good News: The ATO Allows You to Fix It

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According to the ATO's ruling TR 2000/2, taxpayers are allowed to restructure a mixed-purpose loan into separate sub-accounts.

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Here’s what the ATO says:

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“If the sums borrowed under two separate accounts are equivalent to the respective income-producing and non-income producing parts of the existing outstanding debt, we accept that interest accrued on the debt incurred in refinancing the income-producing portion of the mixed-purpose debt will be deductible.”

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This means you can restructure the loan into two clean splits and preserve the deductibility on the investment portion—if done correctly.

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A Realistic Example: Fixing the Loan Split

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Let’s say Sarah took out a $600,000 loan for her home. A year later, she redraws $120,000 from the same loan to use as a deposit for an investment property.

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Her original home loan now becomes an intertwined $720,000 loan—part personal, part investment.

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At this stage, her loan is considered “mixed.” Any repayments she makes will reduce both the investment and private components proportionally. The longer she leaves it, the harder it becomes to untangle.

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What should Sarah do?

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She should contact her lender (or refinance) and restructure her loan into two parts:

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• Loan A – $600,000 (Private Use)
  
  
• Loan B – $120,000 (Investment Use)
  
  

From this point forward:

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• She can claim interest on Loan B as a tax deduction.
  
  
• She can make personal repayments toward Loan A to reduce her non-deductible debt.
  
  

Why It’s Important to Act Quickly

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Every deposit made into a mixed loan will reduce both portions. The more transactions occur, the harder it becomes to calculate the correct interest apportionment for tax purposes.

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Worse still, if repayments reduce the deductible investment portion, you’re literally reducing your tax claim—losing money each month without realising it.

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By splitting early, you:

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• Prevent further mixing
  
  
• Preserve your deductions
  
  
• Simplify your loan management
  
  
• Avoid messy retrospective calculations
  
  

Key Considerations When Splitting Loans

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• Make sure the split values accurately reflect the investment and personal portions at the time of the restructure.
  
  
• Avoid using redraw or offset accounts across both splits to prevent re-contamination.
  
  
• If unsure of the proportions, speak to your accountant before instructing your lender.
  
  

Final Thoughts

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You can’t unscramble an egg—but the ATO gives you a second chance to unmix a mixed loan. Whether it’s been a few months or a few years, it’s worth reviewing your loan structure to ensure your deductions are preserved and your borrowing is clean.

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Need Help Reviewing or Splitting Your Loan?

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At PlanTax, we regularly help clients unmix and restructure loans to restore deductibility, avoid tax headaches, and set up for future investments. Whether you're looking to fix past errors or plan smarter from the start, we're here to help.