I rang my bank to ask to split my home loan so I can debt recycle and purchase our first investment property with my partner. Here is what I requested:
1. Split current Home Loan of PPOR into 2 loans
a. Current Home Loan (non-tax-deductible)
b. New Split Investment Loan (tax-deductible) with redraw facility and a new dedicated offset account -
The bank then said:
1. if a new split account is opened for the purpose of purchasing an investment property, a different rate will apply, equivalent to an investment property rate. The PPOR rate will remain the same.
2. When I commence debt recycling and pay of the split loan and pull the money back out to the new dedicated off set account, it is not the full amount I will get back. The first monthly payment of the existing mortgage will be deducted from the money that is redrawn. Ex: if the new loan split is $100,000 and my monthly mortgage for the PPOR is $1000. I will only redraw a maximum of $99,000.
I thought speaking to the bank would solve my concerns, but it just made me more confused.
Any thoughts?
Thanks.
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4 replies
ATO Certified Response
Author: KaraATO(Community Support)Community Support ATO Certified Response27 Nov 2025
Hi @elbartoaparicio,
Your bank is correct that different loan rates may apply when you split your home loan. This is a commercial decision by lenders and doesn't affect the tax deductibility of interest.
When you make extra repayments on your loan, your ability to redraw those funds depends on your loan agreement with your lender. From a tax perspective, the important point is that the deductibility of interest is determined by how the redrawn funds are used.
If the funds are used for income-producing purposes, such as buying an investment property, the interest on that portion is generally deductible. If they’re used for private purposes, the interest is not deductible.
Here's how it works for tax purposes:
- interest on funds used to purchase an income-producing investment property is tax deductible
- interest on your PPOR loan remains non-deductible
- if you redraw funds for investment purposes, the interest on that portion becomes deductible
- you must apportion interest expenses based on how the loan funds are used.
The important thing is maintaining clear records of what each portion of your loan is used for, as this determines the deductibility of interest expenses.
Debt recycling can be complex, so i'd recommend speaking with a registered tax agent who specialises in this area. If you’re still unsure about the tax side, you can also contact our tailored technical assistance team for guidance.
Hi Kara,
Thank you for your response.
Since you mentioned maintaining clear records, I would also like ask regarding this.
We are using money to purchase the investment property from cash we obtained from refinancing our current PPOR. We received the equity funds in the offset account tied up with our PPOR mortgage. To avoid cross contamination, we opened a new off set account and transferred the entire amount into this new offset account. We won the property on auction last week and paid the initial 5% deposit of the IP.
However, to complicate things, we just found out today that the account that is holding the funds to purchase the IP is under my name only and does not include my partner. For the purpose of proper documentation, is it ok that we continue to keep the funds in the account under my name or should we open a new joint account in both our names? The IP is a joint purchase with my partner 70/30 split.
Thanks again.
Author: KaraATO(Community Support)Community Support 4 Dec 2025
Hi @elbartoaparicio,
It’s fine to keep the funds in an account under your name only, even though the investment property will be jointly owned. It's more about seeing where the money came from and where it went. Think of it like a detective story: as long as the paper trail makes sense, you’re good.
Since you’re buying as tenants in common with a 70/30 split, that ownership structure determines how income and expenses are divided for tax purposes, not which account holds the cash.
To keep things squeaky clean for tax time, make sure you can clearly trace that the:
- funds came from refinancing your PPOR
- money was transferred to the investment account to avoid 'cross-contamination'
- funds were used specifically for the investment property purchase.
- ownership percentages (70/30) are agreed between you and your partner.
Keep all the supporting docs like bank statements, transfer records, and the property contract showing the split. That way, if anyone ever asks, you can show the receipts.
@KaraATO
great thanks very much! I don't need to transfer the money to another account! appreciate the response.
