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Mixed Loans and Repayments: Why Splitting Matters Before You Pay Anything Off

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One of the lesser-known traps in property finance involves repaying a mixed-purpose loan. Many investors don’t realise that when you pay money into a mixed loan, the repayment gets spread across all portions of the loan—automatically and proportionally. This can significantly reduce your ability to claim tax deductions and affect your financial planning flexibility.

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Let’s explore why this happens, and how to avoid it.

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The Scenario: One Loan, Multiple Properties

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Imagine Daniel took out a $750,000 loan and used it to purchase five different properties, each costing $150,000.

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He lives in one of the properties as his main residence and rents out the other four.

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From a tax perspective, four properties are investment-related, and one is for private use. That means 80% of the loan ($600,000) relates to deductible investment debt, while 20% ($150,000) relates to non-deductible private debt.

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Now, suppose Daniel receives a $150,000 windfall—perhaps from a bonus, inheritance, or asset sale—and wants to pay down the non-deductible portion of the loan related to his home.

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The Problem: Repayments Are Spread Across the Entire Loan

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Because the loan is a single undivided account, Daniel cannot choose which portion of the loan his repayment targets. Any repayment—like his $150,000—gets split across the loan based on its usage proportions.

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In this case:

• 20% ($30,000) of the repayment reduces the private (non-deductible) debt
  
  
• 80% ($120,000) reduces the investment (deductible) debt
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While that might seem fine on the surface, it’s not ideal. By reducing the deductible investment debt, Daniel is limiting his future tax deductions unnecessarily—effectively paying more tax than needed.

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The Solution: Split the Loan First

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Before making any large repayment, the smartest move is to restructure the loan into separate accounts, based on the underlying use of each portion.

According to the ATO’s Tax Ruling TR 2000/2 (paragraph 18), this is fully allowed. You can unmix a loan by creating sub-accounts that mirror the original usage split.

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Daniel’s loan could be restructured as follows:

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• Loan A: $150,000 – Private (Owner-occupied property)
  
  
• Loan B: $600,000 – Investment (Rental properties)
  
  

Now, Daniel can direct his $150,000 repayment entirely to Loan A, eliminating the non-deductible portion without affecting his investment debt.

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Take It a Step Further: Split by Property

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Since you’re restructuring anyway, this is also a good opportunity to split the loan by property. Instead of just one investment loan, Daniel could set up:

• Loan B1: $150,000 – Investment Property 1
  
  
• Loan B2: $150,000 – Investment Property 2
  
  
• Loan B3: $150,000 – Investment Property 3
  
  
• Loan B4: $150,000 – Investment Property 4
  
  

This strategy provides additional flexibility in the future. If Daniel ever wants to sell one of the investment properties, he can pay out the loan tied to that specific asset—without affecting the others. It also simplifies tax tracking and reduces legal exposure, as each property stands on its own from a lending perspective.

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Why This Matters Legally

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If all five properties are tied to one big loan, a default on any portion can potentially expose every property. Splitting protects you by containing financial risk to the specific asset.

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And from a tax perspective, loan clarity ensures you can confidently claim deductions, avoid ATO disputes, and structure future refinancing more strategically.

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Mixed loans can quietly undermine your financial efficiency if not managed correctly. A strategic restructure—especially before making large repayments—can save you thousands in tax and offer long-term flexibility.

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Let PlanTax Help You Restructure Cleanly

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Whether you're preparing for a repayment, planning to invest further, or reviewing your loan setup, we can help you split mixed loans, maintain tax deductibility, and reduce unnecessary risk.

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Book a review with our team to get your loans working smarter—not harder—for you.