Redraw Facility Risk–Hurts Investment Loan and Tax Deduction

When it comes to managing your investment property, flexibility can be a game-changer. One common feature many borrowers rely on is the redraw facility, which allows you to access extra repayments you’ve made on your mortgage. While this can feel like an easy cash flow solution, it’s not always as straightforward as it seems.

What many Australians don’t realise is that tapping into your investment loan through redraws could come with serious tax implications. If misused, it can lead to losing valuable deductions you would otherwise be entitled to claim, potentially costing you thousands over time.

Here’s what you need to know to protect your deductions and avoid costly mistakes when using your loan’s redraw facility.

What Is a Redraw Facility and How Does It Work?

A redraw facility allows borrowers to access any extra repayments they’ve made on their loan above the minimum required amount. For example, if your scheduled monthly repayment is $2,000 but you’ve been paying $2,500, you could potentially withdraw the $500 surplus at a later date.

On an owner-occupier home loan, this might feel like a convenient cash reserve. But when connected to an investment property loan, the ATO treats redraws very differently, particularly when those funds are used for personal rather than investment-related expenses.

How Redrawing Can Affect Your Investment Loan Tax Deductions

The tax deductibility of an investment loan doesn’t hinge on the source of funds but rather their purpose. The ATO is very clear: interest on borrowed money is only tax-deductible if the borrowed money is used to generate assessable income, such as rent from an investment property.

If you use your redraw for personal reasons, you could lose deductions:

Used $20,000 from your redraw facility to pay off credit cards? That portion is no longer eligible for investment loan tax deductions.
Redrew $15,000 for a holiday? Same issue—no deduction, even though the loan itself is for an investment.
Renovating your principal home? If you use investment redraw funds, you’ve crossed into personal use, affecting your loan’s deductibility.

Once personal use is mixed with investment borrowing, the mortgage redraw implications include reduced deductions and complex apportionment calculations, often requiring detailed loan splitting and financial tracking.

Common Mistakes Investors Make with Redraw Facilities

To keep your finances in order and retain tax benefits, avoid these frequent pitfalls:

Mixing Personal and Investment Use

Using your redraw facility to fund personal expenses, such as holidays, home renovations, or everyday bills, immediately affects the tax deductibility of that portion of your loan. Even small amounts can dilute your claims and raise red flags with the ATO, leading to audits or reduced returns.

Not Keeping Clear Records

Without accurate documentation, it’s nearly impossible to prove how redrawn funds were used. This lack of clarity can result in rejected tax deductions, or worse, having to retroactively untangle mixed-use borrowing—an administrative and financial headache no investor wants.

Thinking Redraws and Offset Accounts Are the Same

Many borrowers assume a redraw facility functions just like an offset account, but they operate differently when it comes to mortgage redraw implications. Redrawing funds increases your loan balance and changes the purpose of those funds, while offset accounts simply reduce interest payable without affecting tax deductibility.

Curious how redraws can go wrong? Watch this short video to learn more!

How to Use a Redraw Facility Without Losing Tax Benefits

Smart investors don’t avoid redraws—they manage them wisely. Here’s how:

Use redraws only for investment-related expenses (e.g., property repairs, strata fees, or tenant improvements).
Consider splitting your loan if you anticipate using a portion for personal use—this makes tax tracking easier.
Work with a qualified broker or financial adviser who understands the mortgage redraw implications specific to investment lending.
Explore offset accounts as a safer alternative if flexibility is a priority, but you want to keep your deductions intact.

Discover how to gain more control over your home loan that offers both flexibility and peace of mind.

Redraw vs Offset: Which Is Safer for Tax Strategy?

Though they may seem similar, an offset account offers a clearer separation of funds and no impact on the original loan amount, making it the preferred choice for many investors wanting flexibility without tax risk.

Feature	Redraw Facility	Offset Account
Access to funds	Yes (from extra repayments)	Yes (savings in offset account)
Impacts loan balance	Yes	No
Affects tax claims	Yes, depending on usage	No (as funds are separate)
Tax-safe choice	Only if used strictly for investment purposes	Safer for maintaining full deductibility

Know Before You Redraw

The flexibility of a redraw facility can be appealing, especially when juggling the many costs of property ownership. But when it comes to investment loan tax benefits, a single redraw for personal use can cause long-term issues with deductions and undo the strategy behind your loan structure.

If you’re not 100% sure how your redraw use affects your tax, it’s better to get clear advice before making a move. At LiveInvest Finance Solution, we specialise in helping Australian investors maximise their lending structures and avoid costly missteps. We’ll help you make informed decisions so you can focus on growing your property portfolio, not navigating ATO complications.