I redrew from my investment loan to pay for something personal — can I still claim all the interest?

The loan has been sitting there for years doing exactly one thing: it bought the investment unit. Then money is needed at home — a kitchen, a car, school fees, a hand to the kids — and there is $40,000 of redraw sitting available on an account you already have, at investment-loan rates, approved by nobody because it is already yours to draw. So you draw it. Nothing about the property changes. Same tenant, same rent, same lender.

At tax time the bank sends one interest figure for one loan. That figure is now wrong for your return, and this is the single most expensive misunderstanding in Australian rental tax. In a June 2024 media release the ATO said it estimates that incorrectly reported interest expenses account for 42% of the $1.2 billion rental-related tax gap for individuals not in business — the largest slice of the problem, ahead of repairs, depreciation and everything else.

The rule is about where the money went

Interest is deductible because of what the borrowed money was used for, not because of which loan it sits in or what property secures it. The ATO's position, as at its guidance updated 21 May 2026, is that you can claim interest on the principal you use to buy a rental property that is rented or genuinely held to produce assessable income — and you cannot claim interest on the portion of a loan used for private purposes, whether that portion was there when you took the loan out or arrived later when you refinanced.

Redraw is the case people do not see coming, because it feels like spending your own money — you were ahead on repayments, and you took back what you had already paid in. Tax law reads it the other way. Amounts withdrawn under a redraw facility are not treated as relating to the original purpose of the loan; they take the character of whatever they were used to buy. The ATO's own tax time fact sheet on rental interest expenses puts it plainly: you cannot claim interest on any part of the loan redrawn for private purposes, "even if you're ahead in your repayments".

That is the whole rule. Everything below is arithmetic and consequences.

What it actually does to the numbers

Take a hypothetical owner with a $600,000 investment loan, every dollar of which originally bought the rental property, who is $40,000 ahead on repayments. Halfway through the year they redraw the full $40,000 to renovate the kitchen in the home they live in. The loan balance after the redraw is back to $600,000.

Interest charged before the redraw is fully deductible — at that point the loan was doing only one job. From the redraw onwards, the deductible share is the rental portion over the balance: $560,000 ÷ $600,000, or 93.3%. If interest for the rest of the year comes to $12,000, the deductible part of it is $11,200, and $800 is simply not claimable.

The part that costs real money is not that year. It is that the ratio survives. Once a loan carries a private component, interest must be apportioned in that ratio for the life of the loan, and principal repayments are applied in the same ratio — so every repayment chips away at the private slice and the deductible slice in proportion. One afternoon's redraw quietly changes the deduction on that loan for as long as you hold it.

Three assumptions that make it worse

The first is the fix that isn't one: pay the private part back and go back to claiming everything. The ATO addresses this directly — you cannot repay only the portion of the loan relating to the private purchase, even on refinance. Repayments are apportioned across both purposes until the loan is gone. The instinct to tip $40,000 back in and consider it settled is understandable, and it does not restore a full deduction.

The second is a mix-up between two facilities that look nearly identical in a banking app. A redraw takes money back out of the loan — it is borrowing again, and what it buys decides the tax treatment. An offset account holds your own savings alongside the loan, reducing the interest charged without changing the loan balance or what the loan was used for. Spending money out of an offset account increases the interest you pay, but it does not create a private portion of the loan. Which of the two an owner used is often the first question worth answering, and the answer is frequently not what they assumed.

The third is security. A loan secured against the rental property is not thereby a rental loan. The ATO's guidance is explicit that interest on money used to buy a new home you live in is not deductible even where the rental property is the security. The bank's paperwork and the tax treatment are answering different questions.

The line item next to it, also usually wrong

While the loan documents are out: borrowing expenses are not interest and are not claimed the same way. Loan establishment fees, lender's mortgage insurance, mortgage stamp duty, broker fees and a lender-required valuation are deductible over five years or the term of the loan, whichever is shorter — not in the year you paid them. The exception is small: if the total is $100 or less, it is fully deductible in the year incurred. This is per ATO guidance updated 22 May 2026.

What makes this fixable is that it is a record-keeping problem before it is a tax problem. If a loan has ever been redrawn, refinanced, split or topped up, three facts decide the whole calculation: the date, the amount, and what the money was used for. Those facts are in bank statements that get harder to obtain the further back you go, and a ratio set four years ago still governs this year's return. If you are not sure whether a loan has a private component in it, that is the thing to establish before the return is lodged, not after a data-matched query arrives.

This is general information current as at 3 August 2026, not advice about your loan. The right apportionment depends on your actual loan history and how the property has been used, and it should be worked out on your own documents. That is the part of a rental return we spend the most time on — reconstructing what a loan was actually used for, year by year. Our property investor tax service is built around it, and the investment property calculator will show you what the holding cost looks like once the interest is claimed correctly rather than optimistically.