Best to see a tax agent or ask ATO's technical advice/private ruling
Reading TR 2000/2 may help
Generally, deductibility of a loan is connected to the purpose and not what is used as security. The offset account is not a loan. Any changes to offset doesn't affect the purpose of the loan.
The interest is only a deduction if it's for an income producing asset. If it's not, it would form part of the cost base
- INCOME TAX ASSESSMENT ACT 1997 - SECT 8.1
- https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/calculating-your-cgt/cost-base-of-asset#CostBaseElement3
Option 1 would change the purpose of the loan to purchasing ETFs, Option 2 - the loan purpose remains as purchasing the investment property.
For Option 1, I think all the interest for the purposes of purchasing ETF would be deductible for you regardless of the additional names on the loan,
- https://community.ato.gov.au/s/question/a0JRF000003BQzx2AG/p00368936
- https://www.ato.gov.au/law/view/document?src=ws&pit=99991231235958&arc=false&start=1&pageSize=10&total=1&num=0&docid=EV%2F1052278849971&dc=false&stype=find&tm=phrase-basic-1052278849971
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