Key Takeaways
• If there's any chance you'll want to use your current home as an investment property one day, how you structure your loan now matters enormously - decisions you make now can't be undone later.
• Paying your home loan down to zero feels responsible, but if you later convert that home to an investment, you are going to have to pay tax on the rental income and have no deductible interest to offset it - which is why accountants often say “just sell it.”
• The fix is to preserve the debt while still saving interest. So, park surplus cash in an offset account rather than paying down the principal. Offset withdrawals are treated as your own savings, so the loan's deductibility stays intact.
• Offset and redraw are not the same in this context. Both reduce interest, but money redrawn from a loan is treated as new borrowing - and once you've paid down principal, you can't restore that deductible debt.
• The 2027 budget changes don't remove negative-gearing benefits you might claim in the future if you bought your current home before 12 May 2026.
Here's a conversation I have more often than you'd expect. A new client has worked hard, paid their home loan down to almost nothing, and now they're ready to upgrade to a bigger place. They love their current home and would prefer to keep it and use it as an investment - why not? It's nearly paid off, the rent will be almost pure income. Then they talk to their accountant, who tells them to sell it. They're stunned. Wasn't paying it off the smart thing to do?
It was, right up until the moment they decided they might want to keep it as a rental. That's the part almost nobody plans for, and it's the single most expensive mistake I see good, financially disciplined people make. The good news is, if you're reading this before you've given away a deduction you'll never get back, you can set things up so you'll have a choice when the time comes. Let me explain.
Why a paid-off home makes a poor investment property
Here's the rule behind everything that follows: in Australia, loan interest is tax-deductible when the property the loan was used to buy or finance is being used to produce income. So if you have a loan against your home and you move out and rent it, the interest on that loan generally becomes tax-deductible from that point because the property has become an income-producing asset.
The flip side is just as important; a loan on a property you live in isn't tax-deductible, because that property isn't earning anything.
Now picture the client I mentioned; they've paid their home loan down to about $50,000. They borrow again and move into a bigger property whilst renting out their old one.
Now they have rental income coming in but they are going to be taxed heavily on that because they have minimal expenses to offset the income.
This is exactly why many accountants will recommend that the old property is unsuitable to be used as an investment. Instead, they suggest selling and buying a purposefully sourced investment property that is appropriately debt-structured.
That may be sound advice given the situation, but it can cause some heartache and be expensive in terms of transaction costs (agent's fees, stamp duty, etc).
The fix: preserve the debt, don't extinguish it
Here's the thing most people don't realise until it's too late. You can save exactly the same interest as paying down your loan, without destroying the future tax benefit, by using an offset account instead.
For example; if you owe $400,000 and keep $100,000 in the offset, you're only charged interest on $300,000 - the same saving you'd get from paying $100,000 off the loan.
But here's the difference that matters: the loan balance is still $400,000. The debt is preserved. So if you later turn that home into an investment, you've got $400,000 of deductible debt working for you, and your $100,000 is sitting in cash ready to become the deposit on your new home.
The ATO treats money taken out of an offset account as a withdrawal of your own savings - not new borrowing - so it doesn't affect the deductibility of the underlying loan. So you get the interest saving while you're living there, and you keep the deductible debt for when it becomes an investment.
Offset and redraw are not the same thing
This is where I see people come unstuck through not understanding the difference between the two.
When you put extra money into a redraw facility, you're actually reducing the loan balance. If you later pull that money back out, the ATO treats it as brand-new borrowing, and the deductibility depends entirely on what you spend it on. Redraw it to fund the deposit on a new home to live in, and that portion is private - non-deductible, permanently.
Money in an offset, by contrast, never reduces the loan balance, so there's nothing to “re-borrow” - you're just moving your own cash. If there's any chance your home could one day become a rental property, the rule is simple: keep surplus in offset, not redraw, and don't pay the principal down below what you'll want as deductible debt later.
Get this right at the start and it's effortless. Get it wrong and it can cost tens of thousands in lost deductions over the life of the loan.
What the 2027 budget changes mean for this
You might be wondering whether the recent tax changes make deductible debt pointless. They don't - and this is worth understanding clearly. From 1 July 2027 the government is replacing the 50% CGT discount with inflation indexation and a 30% minimum tax, and limiting negative gearing on established residential property to new builds. These measures are announced but not yet law.
Two things to hold onto. First, none of this removes the deductibility of interest itself - a properly geared investment loan still produces deductions that reduce the tax on your rent. What changed is what you can do with a net loss: for established properties bought after 12 May 2026, losses can only be offset against other property income or carried forward, not against your salary. Second, and most importantly for this article: if you already own the home you're thinking of keeping, you're grandfathered. Properties held at that 12 May 2026 cut-off keep the current negative gearing treatment.
So having deductible debt against an investment property is still clearly advantageous after the budget. For grandfathered owners, full negative gearing survives. For everyone else, the deductions still work against the rent - the change just means the strategy leans more towards neutral or modest gearing rather than aggressively negative gearing against your wage. Preserving deductible debt via offset beats extinguishing it every time. Your accountant can model your specific position, but the structural principle holds.
Plan it before you upgrade, not after
If there's even a chance you'll want to keep your home as a rental down the track, the time to set it up is now - not the day you decide to move. Once you've paid the principal down or redrawn for a private purpose, that deductible debt is gone for good. If you're thinking about upgrading in the next few years and want to keep your options open, book a free chat with me.
We'll structure your current loan so you save interest today and keep the door open to a properly geared investment tomorrow - and I'll always tell you straight if keeping the property doesn't stack up.
4. FAQ Section
Why does my accountant want me to sell my home instead of keeping it as a rental?
Usually because you've paid most of the loan off. A near-paid-off home converted to a rental produces taxable rent with almost no deductible interest to offset it, while the new loan on the home you move into is private and non-deductible. The numbers work badly. Structuring with an offset account from the start avoids this.
What's the difference between an offset account and redraw for tax purposes?
Money in an offset reduces the interest you're charged but doesn't reduce the loan balance, so the debt - and its future deductibility - stays intact. Redraw actually reduces the balance, so pulling funds back out is treated as new borrowing, with deductibility depending on what you spend it on. For anyone who might later rent out their home, offset is the safer choice.
Can I get the tax deduction back if I've already paid my loan down?
Not for a private purpose. If you redraw or pay principal down and then use that money to buy a home to live in, the interest on it isn't deductible. You can only get deductible interest by borrowing for an income-producing purpose. This is why preserving the debt early matters - confirm the specifics with your accountant.
Did the 2027 budget changes mean negative gearing is no longer relevant?
No. Interest on an investment loan is still deductible. The changes limit how negative-gearing losses on established properties bought after 12 May 2026 can be used - against property income or carried forward, rather than against salary. If you already owned your home before that date, you're grandfathered under the current rules.
