Most Australians with a mortgage want to know whether they can claim the interest at tax time. The short answer is usually no for a home you live in, but the position can change where borrowed funds are used to earn assessable income or carry on a business.
The important point is that a deduction is not determined by the label on the loan, the property used as security, or what the lender calls the account. It depends on what the borrowed money is used for. Getting that distinction right can help you claim what you are entitled to, while avoiding a mixed loan that becomes difficult to manage.
The general rule: a loan for your own home is private
Interest on a loan used to buy, build or renovate your principal home is generally a private expense. That means it is not deductible merely because you work from home, have a home office, or occasionally take business calls from the kitchen table.
The same applies to interest on money borrowed for personal purposes, such as:
- buying or improving the family home
- paying private school fees
- buying a private vehicle
- funding holidays or household spending
- consolidating personal debts
- helping family members with private expenses.
It does not matter if the loan is secured against an investment property, a business property or your home. The security for the loan is not the deciding factor. The relevant question is what the borrowed funds were actually applied to.
For example, a homeowner may refinance their home loan and draw additional funds to purchase a private car. Even if the entire loan is secured against the home, interest relating to the amount used for the car remains private and non-deductible.
When home-loan interest may become deductible
Interest may be deductible to the extent borrowed funds are used to produce assessable income or, in appropriate circumstances, in carrying on a business.
This can arise in several common situations.
Your former home is rented out
If you move out of a property and rent it to tenants, or genuinely make it available for rent, interest on the loan may become deductible from the time it is used to produce rental income.
The property does not need to have been bought as an investment initially. A home can become a rental property later. However, deductions must be considered from the date the income-producing use begins, not retrospectively for the years you lived there privately.
To support an interest claim, the property should be rented on commercial terms or genuinely available to rent. This generally means it is properly advertised, accessible to prospective tenants and offered on conditions that make a tenancy reasonably likely.
If the property is used privately for part of the year, such as being kept available for family holidays or occupied by the owner, the interest claim may need to be reduced accordingly.
You redraw funds for an income-producing purpose
A redraw from a home loan is treated differently from simply withdrawing your own savings. When you redraw, you are effectively borrowing again.
If redrawn funds are used to acquire or support an income-producing investment, interest attributable to that redraw may be deductible. For instance, a homeowner might redraw from their mortgage to contribute to the purchase of a rental property.
However, this does not make the interest on the whole home loan deductible. The original part of the loan used to buy the family home remains private. The loan has become a mixed-purpose loan, containing both private and income-producing components.
The interest must then be apportioned on a fair and reasonable basis. This can become complicated over time, particularly where there are further redraws, additional repayments, refinances or loan restructures.
You borrow to fund a genuine business purpose
A sole trader may borrow money against their home to buy stock, equipment, business premises or other assets used in a business. Interest may be deductible to the extent the funds are genuinely used in carrying on that business.
The same broad principle can apply to other business arrangements, but the correct treatment depends heavily on the business structure and the exact flow of funds. For example, borrowing personally to put money into a company is not automatically straightforward simply because the company operates a business.
Before using home equity to fund a company, trust, partnership or investment arrangement, obtain tailored advice. The legal borrower, owner of the income-producing asset, recipient of income and use of the funds can all affect the outcome.
Working from home does not usually make mortgage interest deductible
Working from home has become normal for many employees and business owners, but that alone does not make mortgage interest deductible.
Most people who work from a bedroom, study, dining table or spare room can potentially claim eligible running expenses. These may include a work-related share of electricity, internet, phone costs, cleaning, consumables and the decline in value of relevant equipment.
Mortgage interest is different. It is an occupancy expense, which is usually private in nature.
A portion of mortgage interest may be available only in limited circumstances, generally where an area of the home has the character of a genuine place of business. Relevant features can include whether the area is:
- clearly identifiable as a business area
- used exclusively or almost exclusively for work or business
- not readily suitable for ordinary domestic use
- used regularly by clients or customers.
A desk in a spare bedroom that is also used for guests, storage or family activities will often fall short of this standard. A separately fitted-out consulting room, home salon, workshop or studio with client access may be more likely to qualify.
There is also an important trade-off. Claiming occupancy expenses for part of a home can affect the capital gains tax treatment when the property is sold. The main residence exemption may not fully apply to the relevant business-use portion and period. This consequence can arise where an area has the character of a place of business, even if the available mortgage-interest deduction is not claimed.
Redraw facilities, refinancing and mixed loans need careful handling
Mixed loans are one of the most common sources of errors in property and investment deductions.
A mixed loan arises where one loan account is used for both deductible and private purposes. For example, a loan may start as a rental-property loan, but later be redrawn to fund a holiday, private renovation or car purchase. It can also happen when a home loan is redrawn to purchase investments.
Once private and income-producing borrowings are mixed in one account, every interest calculation requires apportionment. Further repayments do not usually allow you to choose to repay only the private portion first. Instead, repayments generally reduce both components proportionately.
This means a small private redraw can create a long-term record-keeping problem.
A more practical approach, where possible, is to keep separate loan splits or sub-accounts for separate purposes. For example:
- one account for the private home loan
- one account for the rental-property purchase
- one account for investment-related renovations
- one account for a separate business borrowing.
Separate accounts do not create deductibility by themselves. The funds must still be used for an income-producing purpose. However, clean loan splits make the purpose of each borrowing easier to demonstrate and reduce the risk of incorrect apportionment.
Refinancing requires the same discipline. If an investment loan is refinanced and the new borrowing simply replaces the income-producing debt, interest may continue to be deductible to the relevant extent. But if extra funds are released and used privately, that private component must be separated and excluded from the claim.
Be particularly cautious with debt-reduction strategies marketed as ways to “convert” private home-loan interest into deductible interest. Tax outcomes depend on the actual legal and financial steps taken, not the marketing description. Arrangements designed to generate additional deductible interest without a commercial explanation can attract scrutiny.
What you can claim besides interest
Interest is not the only cost connected with borrowing. Where money is borrowed for an income-producing purpose, certain borrowing expenses may also be deductible to the relevant extent.
Depending on the circumstances, these can include costs such as:
- loan establishment fees
- lender fees charged to set up the loan
- mortgage registration and discharge costs
- loan-document preparation costs
- valuation fees required by the lender
- certain broker fees connected with arranging the loan.
These expenses are not the same as interest. Their deduction may be spread over the loan period rather than claimed immediately, and the treatment changes where the borrowed funds are used only partly for income-producing purposes.
It is also worth separating borrowing expenses from property purchase costs. Not every cost incurred when buying a property is deductible as a borrowing expense. Some costs may instead form part of the property’s capital gains tax cost base, while others may have different tax treatment again.
A practical example
Consider a couple who own and live in a home with a mortgage. They later decide to purchase a rental property and redraw funds from their home loan to pay part of the deposit and acquisition costs.
The interest on the original home-loan balance remains private. However, interest attributable to the redrawn amount may be deductible to the extent those funds were used for the rental investment.
The difficulty is that the home loan is now mixed. If the couple later redraws more money for a kitchen upgrade in their home, or makes irregular extra repayments, working out the deductible interest can become increasingly complex.
A cleaner structure may have been to establish a separate investment loan split before drawing funds. That would not change the need for the money to be used for the rental property, but it would provide clearer evidence and simpler ongoing record keeping.
Records that support a legal claim
Good records are essential, especially where a loan has more than one purpose. A bank’s annual interest statement does not, by itself, prove that all interest is deductible.
Keep documents that show:
- the original loan contracts and statements
- loan split or sub-account details
- redraw dates and amounts
- bank statements tracing funds from the loan to their use
- settlement statements for property purchases
- invoices for deductible repairs, renovations or business assets
- rental agreements, advertising records and property-manager statements
- a clear calculation of how interest has been apportioned.
For rental properties, records generally need to be retained for the required period after lodging the relevant tax return. Where an asset may later be subject to capital gains tax, it is sensible to retain purchase, improvement and ownership records for substantially longer.
The key takeaway
Interest on a home loan is not deductible simply because you have a mortgage. For a home you live in, it is generally a private expense. A deduction may be available only to the extent borrowed funds are used to earn assessable income or carry on a qualifying business activity.
The best way to maximise a claim legally is not to chase a deduction after the fact. It is to structure borrowings carefully, keep private and income-producing debt separate where possible, retain clear records and review the tax consequences before redrawing or refinancing.
This article is general information only, not personal financial or tax advice. Your circumstances may involve rental income, business structures, capital gains tax or mixed-purpose borrowing issues. Speak with a registered tax agent or accountant, such as Ample Finance, before acting on a borrowing or claiming strategy.