Refinance to Access Equity: What Not to Do

Releasing equity to buy an investment property is a credit decision and a tax decision at the same time, and the way you structure the loan determines how much interest you can claim.

This article is written for judicial officers who hold equity in a home and are considering a refinance to fund an investment purchase. It sets out the structural errors to avoid before you apply.

What Is a Cash Out Refinance to Access Equity for Investment?

A cash out refinance replaces your existing home loan with a larger one, and the extra amount is released as funds you can use for an investment deposit and costs. Because the total debt rises, it is not a like-for-like refinance as APRA describes that term, so the lender will assess it as new borrowing.

For a full picture of the product, see our page on equity release loans for lawyers. Lenders will assess your income and commitments individually, and judicial officers can expect to provide standard income documentation.

Mistake One: Mixing Private and Investment Borrowings in One Loan

Putting investment funds and private funds in a single loan makes you apportion interest, and the resulting ratio stays with the loan. The ATO states that interest is deductible only on money used to produce rental income, so security does not decide deductibility. The use of the funds does.

Where a loan has both purposes, the ATO formula is total interest multiplied by the rental portion of the loan, divided by total borrowings. Principal repayments are applied in the same ratio, so you cannot pay down only the private portion. A redraw used for a private purpose changes the ratio from that point.

The cleaner approach is usually a separate loan split for the investment amount. The trade-off is that extra splits can add fees and complexity, and your accountant should confirm the structure before you sign.

Can You Claim Interest on Released Equity?

Interest on released equity is deductible only to the extent the funds are used to buy or improve a rental property or meet deductible costs. Interest on any part used for private purposes is not deductible, whether that use occurs when you take out the loan or when you refinance it.

Consider a buyer who refinances and releases a sum, uses most of it for an investment deposit, and keeps the remainder in an account for a family holiday. The remainder is private use. Interest on that part cannot be claimed, and the loan needs to be apportioned. If the whole released amount had gone to the investment, the full interest on that amount would generally be claimable, subject to your accountant's advice. The outcome here depends on records, so keep the refinance documents and note what each amount was used for. Tax outcomes depend on your circumstances, so speak with your accountant.

How Negative Gearing Changes Affect Your Planning

From the 2027-28 income year, net rental losses on established residential properties acquired after 7:30pm AEST on 12 May 2026 are deductible only against residential property income. Properties held at that time, and eligible new builds, continue to be treated under the earlier rules, as set out in the Treasury Laws Amendment (Tax Reform No. 1) Act 2026.

The rules turn on when the property was acquired and whether it is a new build, not on when the loan was taken out. It is not clear whether refinancing or increasing the loan on a property you already hold affects its treatment, so get advice from your accountant before changing the loan. If you are weighing a first purchase, our page on buying your first investment property covers the wider decision.

Do Not Assume Your Current Lender Will Say Yes

A new lender must assess your ability to repay at a rate at least 3 percentage points above the loan rate, and that applies to the larger loan as well. APRA confirmed in May 2026 that this buffer would stay at 3 percentage points.

So a loan you currently service comfortably may not pass assessment at a higher amount. Your borrowing capacity depends on the lender, your income, your existing commitments and the property valuation. Lenders also apply their own policy, and valuation affects how much equity is available. A lower valuation than you expected reduces the amount you can release.

Refinance Costs and Break Fees: What to Check First

Before you refinance, add up the costs, because they can outweigh any saving. A fixed rate loan may attract a break fee if ended early, and a discharge fee or application fee may also apply.

Exit fees on residential loans entered into on or after 1 July 2011 are prohibited under the National Consumer Credit Protection Regulations, but that prohibition does not cover break fees or discharge fees. If your fixed term is ending, see fixed rate expiry before you move. Where you have less than 20 per cent equity after the increase, lenders mortgage insurance may apply, which increases the cost.

ASIC guidance for brokers notes that refinancing costs can exceed the savings. A recommendation to switch should account for the full cost, including any broker fee.

Worked Example: Releasing Equity with an Illustrative Rate

Consider a judge with a home loan balance of $600,000 who refinances to $800,000, releasing $200,000 for an investment deposit and costs. At an illustrative rate of 6.75% p.a. over a 25-year term, the repayment on the full $800,000 is about $5,527 a month. The same rate on the original $600,000 over 25 years is about $4,145 a month, so the released funds add about $1,382 a month before any rent is received.

The solution is to split the loan into two parts, $600,000 for the home and $200,000 for the investment. Interest on the $200,000 is the amount to be claimed, with the accountant's confirmation. The outcome is a clear record of purpose, no apportionment of the investment portion, and a repayment shortfall that can be weighed against expected rent. The rate is illustrative only, and your actual rate will depend on your lender and deposit size. Use a calculator or our home loan refinancing for lawyers team to test the numbers.

Check the Loan Features Before You Commit

Offset and redraw features change tax outcomes. An offset account on the home portion can reduce home loan interest without altering the investment loan's purpose. A redraw on a split loan used for private spending changes the deductible ratio from that point, so be deliberate about which loan holds redraw.

The trade-off is that offset accounts often carry a higher rate or annual fee, depending on the lender. Compare the total cost, not only the headline rate. For rate reductions, see getting a lower interest rate.

Call one of our team or book an appointment at a time that works for you, and we will review your structure with your accountant's input in mind.

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