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Why You Should Never Mix Loans (And What to Do If You Already Have)

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One of the most common issues we encounter when reviewing a client’s loan setup is what’s known as a “mixed-purpose loan.” Around 90% of clients who’ve managed their own borrowing without advice have made this mistake, often unknowingly. And while it may seem like a harmless way to manage funds, it can cost you real money—especially when it comes to tax deductions.

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Let’s break it down and explain why you should avoid it—and what to do if it’s already happened.

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What Is a Mixed Loan?

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A mixed loan is a single loan account that’s been used for multiple purposes—some private, some for investment.

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This often happens when clients use redraw facilities on their existing home loan to fund a deposit or renovation for an investment property. If that loan originally funded their home (non-deductible), and they later redraw from it for an investment (deductible), the loan becomes a blend of both purposes.

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Why Mixed Loans Are a Tax Trap

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Here are the key problems that come with a mixed-purpose loan:

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Problem 1: Principal and Interest (P&I) Repayments Reduce the Deductible Portion

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If your loan is a P&I loan, every repayment reduces the loan balance. But when the loan is mixed, you can’t choose which portion gets reduced first. So, every repayment reduces both the deductible (investment) and non-deductible (personal) parts proportionally.

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That means every dollar you repay could be decreasing your tax deduction. In short, you’re paying more tax than you need to.

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What to do instead:

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Before redrawing or using funds for investment, split the loan into separate accounts. That way, you can control where your repayments go and preserve deductibility on the investment portion.

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Problem 2: Complex Interest Apportioning

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Once a loan is mixed, you need to work out how much of the interest applies to each portion. That means applying percentages based on the balance of each purpose—month after month.

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For example, if 25% of the balance is for investment, then 25% of your interest is deductible. Sounds simple? It might be at first, but once transactions start piling up (repayments, redraws, rate changes), the calculation becomes messy and often impossible to manage accurately without professional help.

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Problem 3: Offset Accounts Create Additional Confusion

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Let’s say you’ve got $150,000 in your offset account, and your total loan is $200,000—$50,000 of which is investment-related. You might assume the offset is reducing your personal loan interest only, but that’s not how it works.

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The offset reduces interest on the entire loan balance, including the investment portion—meaning you’re accidentally diluting your interest deduction.

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Again, the fix is simple:

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Split the loan. You can then link the offset to the non-deductible part only, ensuring you're not compromising your investment deductions.

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Problem 4: Selling the Property Later

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If you sell either your main residence or investment property, having a mixed loan can make things unnecessarily complicated.

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For example, selling your home (used as security for the mixed loan) might force you to pay out the loan in full—including the investment portion. That could leave you with less cash to buy a new home and result in lost tax deductions if you can't preserve the investment loan.

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Once again, splitting the loan before selling ensures flexibility and clarity.

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What If You Already Have a Mixed Loan?

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The good news: you can fix it—but it takes care and a bit of maths.

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The ATO allows you to restructure mixed-purpose loans using a method called "notional splitting." You’ll need to:

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1. Work out the portions of the loan used for each purpose.
   
   
2. Split the loan based on those amounts into two (or more) separate accounts.
   
   
3. Going forward, keep each split separate—no redraw, no transfers, no offset sharing.
   
   

Once you’ve done this, you can ensure the investment portion is properly managed for tax deductibility.

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Final Thoughts

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Loan structuring may not seem like a big deal—until you realise you’re losing thousands in tax deductions each year.

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Whether you're just starting to invest, or you’ve made the mistake already, it's never too late to fix it. With the right loan structure, you can save on tax, keep clean records, and maintain flexibility with your property finance strategy.

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Need Help Reviewing or Restructuring Your Loans?

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At PlanTax, we work closely with clients and their mortgage brokers to set up clear, tax-efficient loan structures from the outset. And if you already have a mixed loan, we can help you calculate the proportions, restructure them properly, and get back on track.

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Reach out to us today before your next repayment chips away at your investment returns.