If you’ve been paying extra off your home loan you have likely been adding money to your redraw account which comes standard on nearly all home loans. On the surface, it looks like the ideal situation. You get to pay down your loan faster, save on interest, and still have access to the money if you need it. 

A lot of the time it can be great, but not always!  

If you are a homeowner looking to upgrade or downgrade and retain this home as an investment property then you could be throwing away thousands of dollars of potential tax deductions by using redraw. 

Let’s walk through what a redraw facility actually is, when it’s genuinely useful, where it goes wrong, and the one scenario where using it (or even just relying on it) can cost you thousands in lost tax deductions every year.

What is a redraw facility?

A redraw facility lets you take back extra repayments you’ve made on your home loan, over and above your minimum required repayments.

Say your minimum repayment is $3,000 a month and you’ve been paying $3,500. That extra $500 a month reduces your loan balance faster than the lender requires. Over a few years, those extra repayments add up  and your redraw facility is the pool of those extra repayments that your lender allows you to withdraw again.

The most important thing you need to know is that when you make extra repayments you are genuinely paying down your loan. It isn’t like an offset account where the money sits there. Your redraw has reduced your loan balance. Because of this, when you go to take that money back out again. It is like you are getting a new loan again. 

This means you are paying down and then re-borrowing it. The re-borrowing is where the tax messiness and consequences come in. Which I will explain later. 

Why would you use one?

Home loans calculate interest daily on your outstanding balance, every extra dollar you park in the loan reduces the interest you’re charged from that day forward. If your home loan rate is 6%, paying an extra $20,000 into your loan effectively “earns” you 6% tax free, because you’re saving interest rather than earning taxable income. Very few savings accounts can compete with that.

Redraw also imposes a bit of helpful friction. Money in your loan is slightly harder to spend than money in your everyday account, which suits people who want to save aggressively without the temptation of one tap spending. There is a psychological barrier when you have to “redraw” money from a home loan you have already paid off!

For an owner-occupier who plans to live in their home long term and never rent it out, a redraw facility used this way is a perfectly reasonable tool depending on the individual. 

The Downsides of Redraw

Now coming back to the messiness and downsides.

Redraw is a feature the lender controls, not money you own on demand. Your loan contract typically gives the lender discretion over this. The lender can charge you fees on redraw, cap how much you can take out and how often. You don’t have the same flexibility compared to if it was in a bank account. 

Some loans restrict or exclude redraw entirely. Fixed-rate loans often cap the extra repayments you can make (commonly $10,000–$30,000 per year, depending on the lender) and may not allow redraw at all until the fixed term ends.

The big one: turning your home into an investment property

Under Australian tax law, the deductibility of interest follows the purpose of the borrowing, not the property that secures the loan. The ATO’s position (set out in Taxation Ruling TR 2000/2) is that every redraw is treated as new borrowing. Whether the interest on that redrawn amount is tax deductible depends entirely on what you use the money for.

Here’s how that plays out in the classic upgrader scenario.

Scenario: You have a home with a $500,000 loan remaining. You get a windfall of cash and you pay an extra $50,000 into it, so your balance sits at $450,000 with $50,000 available in redraw. Let’s say you now want to upgrade. You buy a new family home, redraw the $50,000 to help fund it, and keep your old home as a rental.

Your loan balance is back to $500,000, and the property securing it is now an investment property. So the whole $500,000 is deductible debt, right? RIGHT?

No. Only $450,000 of it is. You have lost $50,000 of tax deductible debt.

The original $450,000 relates to the purchase of what is now your rental property, that interest is deductible. But the $50,000 you redrew is new borrowing, and its purpose was private: buying your new family home. Interest on that portion is not deductible, even though the loan is secured against the rental.

It gets worse: the trap fires even if you never redraw. Suppose you don’t touch the redraw at all. You simply paid your loan down to $450,000, and now you’re converting the property to a rental. Your deductible debt is $450,000 — permanently. You can’t “redraw it back up” to $500,000 and claim the full amount, because the redrawn funds would still be new borrowing for whatever you spend them on. Every extra dollar you paid into that loan has permanently shrunk the tax-deductible debt on your future investment property.

And the mess compounds. Once a single loan contains both deductible (investment-purpose) and non-deductible (private-purpose) portions, it becomes a mixed-purpose loan. The ATO requires every repayment to be apportioned across both portions, you can’t direct your repayments at the private slice to pay it off first. That 90/10 split follows you around, complicates your accountant’s job, and lingers on your tax return for years.

Here that sound? That’s the screams of your accountant.

So when should you use redraw?

Redraw works well when the story is simple, you own your home, you intend to keep living in it, and you want your spare cash working against your mortgage.

Where you should pause is any scenario where your home might one day become an investment property. If there’s even a chance you’ll upgrade and keep your current home as a rental (a very common path for growing families) then every extra dollar you pay into your home will shrink your future tax deductions.

The better tool is the mighty offset account

An offset is a transaction account linked to your loan. Your money sits in the offset, it remains your money, in your account and the lender charges interest only on the difference between your loan balance and your offset balance. Same daily interest saving as redraw, but critically, your loan balance never reduces below its contractual position.

We’ll unpack offset accounts in the next article.

Book a call with Kingdom Mortgage Broking and we’ll look at how your loan is structured, what your plans are over the next five to ten years to see if it is structured in a way that will serve you best. 

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This article is general information only and doesn’t take your personal circumstances into account. It isn’t tax advice the tax consequences of redraw, loan purpose and property conversion depend on your situation, so speak with a registered tax agent or accountant before acting.  (CRN 572093) of Kingdom Mortgage Broking (ABN 63 689 434 017).