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Redrawing From a Loan: When It’s Tax Deductible—and When It’s Not

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.

Redraw Means You’re Borrowing—Again

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.

When Redraw Goes Wrong: A Common Trap

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:

  • $135,000 for her home (non-deductible)

  • $15,000 for the car (also non-deductible)


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.

When Redraw Can Be Used Safely

There are situations where redraw can be used tax-effectively, but the key is maintaining a direct link between the borrowing and the investment.

Example:

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.

Be Careful of These Redraw Risks

  1. Loan Closure Risk
    Some lenders automatically close loans once fully repaid. If you’re planning to use redraw later, check your loan terms carefully. In these cases, you might consider leaving a small balance outstanding (e.g., $200) to keep the loan open. This technically creates a mixed loan, but the private portion is negligible.

  2. Contamination Through Bank Transfers
    Avoid redrawing funds into a savings or transaction account before investing. If you redraw into an account that holds other money (e.g., wages, savings), the connection between the borrowed funds and the investment is broken.

    Instead:


    • Use the redraw feature to pay directly to the seller

    • Request a bank cheque issued directly from the loan account

    • Or pay from the loan directly at settlement

Any detour through another account—even for a short time—can make the interest non-deductible.

Key Takeaways

  • Redraw = new borrowing. The purpose of that borrowing matters for tax.

  • Never use redraw for personal spending if the loan was originally for investment—or could be in future.

  • Avoid mixing loan purposes. It makes tax claims harder and less effective.

  • If you plan to invest, redraw can be used—but only if done carefully, with a clear link to the investment purpose.

Speak to PlanTax Before You Use Redraw

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.