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Redraw facilities are a common feature on many home loans, but using them without understanding the tax consequences can lead to expensive mistakes. Just because the money is sitting there doesn’t mean you can freely use it for anything—especially if you're planning to claim interest deductions later.
Let’s break down what redraw really means from a tax perspective, and how to use it without jeopardising your deductions.
Many borrowers don’t realise that when you redraw money from your loan, you are borrowing again. It doesn’t matter that it’s the same loan account—each redraw is treated as a new loan, and the purpose of that borrowing determines whether interest is deductible.
Let’s say Amanda took out a $150,000 loan to buy her first home. Over the years, she paid it down to $135,000, leaving $15,000 available in redraw.
Later, Amanda uses the $15,000 to buy a car.
The result? Her loan now has two purposes:
If Amanda ever decides to rent out the property and claim interest deductions, only the interest on $135,000 can be claimed. The loan is now mixed-purpose, and she’ll need to apportion the interest going forward—making life more complicated and reducing the overall deduction.
There are situations where redraw can be used tax-effectively, but the key is maintaining a direct link between the borrowing and the investment.
James has a $200,000 loan. He comes into a windfall and pays it off in full, reducing the balance to $0.
A few months later, he redraws the full $200,000 and uses it to purchase an investment property.
Because James has borrowed to invest, and the funds didn’t take a detour through another account, the interest on this $200,000 loan can be fully deductible.
Any detour through another account—even for a short time—can make the interest non-deductible.
We regularly help clients clean up mixed loans, set up new facilities for investment, and make sure every dollar they borrow is used tax-effectively. If you're thinking of using redraw or paying off a loan, book a chat with us first—before making a costly mistake.