This snippet is from one of our previous episodes: Q&A – How to Avoid Poor Loan Structure 

It’s a question we get all the time from property investors: “Can I use the equity in my investment property to pay off my home loan faster?” 

In today’s TPC Gold soundbite, Bryce and Ben unpack this exact scenario—and explain why it’s not as straightforward as it seems. 

Spoiler alert: It all comes down to how the ATO views the purpose of your loan. 

In this short but powerful episode, you’ll learn:
💸 What the ATO considers a private (non-deductible) purpose—and how that affects your tax deductions
⚠️ How redraws and lines of credit can accidentally “pollute” your loan structure
✅ Why having separate splits and clean offsets is crucial for clarity and compliance 

Want to Avoid Costly Mistakes in Your Property Finance Strategy?

If you’re thinking about refinancing, using equity, or paying off your mortgage sooner, make sure the structure is right from the beginning. 

Book a free initial appointment with an investment-savvy mortgage broker from our sister company, Empower Wealth.

Need Personalised Tax Advice?

Tax deductibility depends on your personal circumstances and how funds are used. For advice specific to your situation, book an appointment with a qualified tax accountant from our sister company, Empower Wealth.

Remember: No mortgage broker should be giving tax advice. Always speak to a registered tax professional to get it right. 

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If You Enjoyed TPC Gold | Can You Use Your IP’s Equity to Pay Off Your Home Loan Early? You Might Also Like:

• Ep 436 | Warning! Don’t Fall for THESE Mortgage Myths 
• Ep 444 | How to Tackle Mortgage Stress 
• Ep 518 | The Costly Mistakes Property Owners Make in Their Tax Returns (and How to Avoid Them!) – Chat with ATO Assistant Commissioner Rob Thomson 

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Transcript

Bryce Holdaway
We’ll go on to another sort of related question as we get all these segues. This is from Dean. “Hi guys, my question is can you use equity in your investment property to wipe out your principal place of residence mortgage? Cheers, Dean.” I’ll have a go at that. 

Ben Kingsley
Yeah. 

Bryce Holdaway
I’ll have a go at the answer, and you’re the mortgage broker, so you come and tidy up the edges…but the answer is you can do it. This is a common question. So people say: If I secure against an investment property and then pay off a non-tax deductible debt like a principal place of residence, can I do it? The answer is you can do it, Ben. But the tax department looks under and they go: What was the purpose of the loan? And if you secure against your investment properties to use a loan to pay off a private non-tax deductible debt, the tax office just goes “I see what’s going on under here. The purpose of the loan wasn’t for investment. It was actually for a private purpose, therefore we will not allow the interest to be deductible.” So to answer the question, you can do it, but it’s not gonna give you any benefit.  

Ben Kingsley
No, effectively you’re going to have the same debt and it’s still going to be in the same position where it is effectively non-deductible debt. The other classic one that people do here, Bryce, is they release equity from their investment properties or their family home or whatever it may be, and then turn that into an investment property and then say: oh, no, no, no, that property’s an investment property now and I release the equity out of that to put a deposit down for my new upsized family home. Surely I can claim that because it’s against that investment property. No, purpose of funds test – in terms of what it does, that money is still non-deductible. So be very careful. People just think that they can pay loans down and then release the money against all that, and that’s going to be deductible? Not true.  

Bryce Holdaway
Love it. Ben, beware of pollution. So this is often something that people don’t think about. So for example, let’s say you do everything by the book. You set up a loan, it’s for investment purposes only. You’ve got a redraw facility Ben, and what happens is you think: well, with that redraw facility, I’m going to put all of my income into the redraw facility, and for five days, I’m going to have all the interest benefits of that. And then on a Thursday, I’m going to pull my cash out and pay for the groceries.  

Problem: The pulling out of the money just changed the purpose of the loan. You have just fully polluted that loan. So it was initially set up with an intent for investment, and the fact that you parked some money there and pulled it out for groceries at the end of the week; you have just polluted the loan. You’ve just made that loan very complicated, which is why an offset facility is cleaner and avoids the pollution over a redraw facility.  

Ben Kingsley
And while we’re at it, Bryce, and we’ve talked about this before, the other great pollution killer, or basically the interest deductible killer, is lines of credit. I get $100,000 line of credit, I use $80,000 for investment purposes, and $20,000 to buy a car. 

Bryce Holdaway
Ooh I like this one. 

Ben Kingsley
I then start paying off that car thinking that I’m paying off that portion that I took out for the car. Tax office doesn’t see it that way at all. The first $20,000 that you put in there is actually paying off the $80,000 investment debt. So this is another example of where an investment-savvy mortgage broker will separate out potentially a small amount for personal use and separate that in a different loan split for investment use. You can have multiple splits. It obviously requires a little bit more understanding and management, but ultimately it’s as simple as using your MoneySMARTS. Everything goes into that primary cap.  

Doesn’t matter if you’ve got a hundred loans under that; if one of those loans is for personal use, you’ve obviously got to pay that off. But it’ll be drawing that money from the primary account, exactly like all of the rental income you’ve got coming from all your properties will be going into that primary account. So there’s one central transactional account in which all of that money is going to be serviced from.  

Bryce Holdaway
Don’t pollute, Ben.  

Ben Kingsley
Don’t pollute, Bryce. At the end of the day, no mortgage broker should be giving tax advice. And here, we’re not giving advice, we’re just sort of saying these are the pitfalls. These are the challenges around that, so no one should be sitting here saying I heard this and I’m going to action this without actually seeking independent advice from a tax accountant. 

Bryce Holdaway
Foundational underneath that discussion Ben was cross security versus standalone, so the good thing is we were talking then about standalone options.  

Ben Kingsley
Yes. 

Bryce Holdaway
But making sure you don’t get the wrong standalone option, particularly for pollution. So great question Dean, thank you for that. Let me quickly get another one for us Ben.