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It might seem harmless—even smart—to temporarily deposit extra cash into your investment loan to reduce interest. But what many investors don’t realise is that this seemingly simple move can cost them thousands in lost tax deductions. It’s a classic example of short-term saving with long-term consequences.

Let’s walk through why this mistake happens and what you should do instead.

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What Does 'Parking' Money in a Loan Mean?

This usually happens when a client receives a lump sum—often from the sale of a home—and places that money into an investment loan without an offset account.

Their reasoning is typically:

• “The loan didn’t have an offset, so I paid it in to save interest.”
  
  
• “It’s just temporary until I settle on my new home.”
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Later, they redraw the same funds to purchase their new principal place of residence (PPOR), believing the loan is still fully deductible.

Unfortunately, they’re wrong.

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Why It’s a Costly Mistake

Here are two key tax concepts to remember:

1. Depositing cash into a loan is considered a repayment
   Once you make a deposit, the loan balance is reduced, and that reduction is treated as if you’ve paid off that debt permanently.
   
   
2. Redrawing from a loan is treated as new borrowing
   The purpose of the new borrowing determines whether the interest is deductible—not the original purpose of the loan.

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So, if you repay part of your investment loan and later redraw it for personal use (like buying a home), that redraw is no longer deductible—because the new purpose is private.

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Real-Life Example

Olivia has an investment loan of $700,000. After selling her previous home, she has $250,000 in cash while waiting to settle on a new property.

To save interest, she deposits the full $250,000 into the investment loan, reducing the balance to $450,000.

Two months later, she redraws $250,000 to buy her new home.

Here’s what really happened:

• Olivia repaid $250,000 of her investment loan.
  
  
• Then she borrowed $250,000 again—but this time for a private purpose.
  
  

The result? She has permanently reduced her deductible debt by $250,000. That’s roughly $12,500 per year in lost deductions (at 5% interest), every year she holds the investment property.

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To make matters worse, her loan is now mixed-purpose—part investment, part private. This complicates tax reporting and reduces flexibility.

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The Right Way: Use an Offset Account

To avoid this, never deposit cash directly into an investment loan. Instead:

• Use a 100% offset account linked to the investment loan. This reduces interest payable without changing the purpose of the loan.
  
  
• If your loan doesn’t allow for an offset, park the funds in a separate high-interest savings account until needed—or consider refinancing to a more flexible loan product.
  
  

By keeping your investment loan balance untouched, your deductibility is preserved, and your records stay clean.

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Trying to save a few dollars in interest the wrong way can result in thousands of dollars in lost tax benefits—not to mention added stress at tax time.

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If you're about to receive a lump sum, sell a property, or fund a new home purchase, speak to your accountant before moving funds around. A small tweak in strategy can make a big difference in long-term financial outcomes.

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Talk to PlanTax Before You Move Funds

We help clients avoid costly mistakes by structuring their finances properly from the start. If you’re dealing with lump sums, redraws, offsets, or investment loans, book a quick chat with us today.

It might save you more than just interest—it could save your deductions.