Most Australian investors who hold an investment property will refinance that loan at least once. A good chunk of them come unstuck doing it.
Not because the process is complicated. Refinancing investment property in Australia is actually fairly straightforward once you know the steps. But the tax rules around refinancing are where things get genuinely tricky, and where a lot of investors quietly cost themselves thousands without ever realising it.
I have seen this play out dozens of times. Someone refinances to get a better rate, pulls out a bit of extra cash while they are at it, and then 18 months later their accountant has to deliver some bad news about what is and is not deductible. A bit of planning upfront would have changed everything.
So let me walk you through what refinancing an investment property actually involves, what the ATO expects from you, and how to approach it in a way that keeps your lending structured correctly.
Why Australian Investors Refinance Their Investment Property
There are three main reasons investors refinance, and it is worth being clear on which one applies to you before you start the process.
Getting a better rate. This is the most common one. If you set your loan up a few years ago and have not reviewed it since, there is a reasonable chance you are paying more than you need to. Lenders regularly reserve their best rates for new customers, so borrowers who do not shop around end up subsidising everyone else’s discounts. That gap can easily be 0.5% or more, which on a $500,000 loan is $2,500 a year.
Releasing equity. If your property has grown in value, refinancing gives you access to that equity without selling. You can draw on it as a deposit for your next purchase, or use it to fund other legitimate investment purposes. This is one of the primary ways scaling investors grow their portfolio without needing large amounts of fresh cash. I have written more on this approach in how to use equity to buy an investment property.
Restructuring the loan. Sometimes investors refinance to switch loan types, consolidate debt, or get into a better structure for their circumstances. There are legitimate reasons to do all of these things, but the structure matters enormously for both tax and borrowing purposes. The interest-only versus principal and interest question is a big part of that conversation.
Understanding your “why” before you approach a lender shapes what you ask for and what outcome you are actually targeting.
What the ATO Actually Cares About When You Refinance
Here is where most investors get tripped up, so it is worth taking the time to understand this properly.
When you refinance an investment property loan, the ATO does not look at the security (the property). It looks at what the borrowed funds are being used for. This is known as the tracing principle, and it matters more than most people realise.
The logic is fairly straightforward. If the original loan was taken out to buy an income-producing property, the interest on that loan is deductible. The ATO’s guidance on rental property deductions is clear on this. When you refinance, the new loan essentially steps into the shoes of the old one. The purpose is still to finance an investment property, so the interest remains deductible.
Where folks get caught off guard is when they add to the loan at the same time as refinancing.
Say your investment property has grown in value and you refinance from $400,000 to $500,000, drawing out $100,000 in equity. If that $100,000 goes towards a deposit on another investment property, the interest on all of it is deductible. But if $50,000 of it goes into your personal bank account to renovate your home or pay off personal debt, the interest on that $50,000 is not deductible. The ATO can and does look at this.
The Loan Contamination Trap
There is a particularly nasty version of this problem that involves redraw facilities, and it is something every investor should understand before they set up or refinance their loan.
If you use the redraw feature of your investment loan to withdraw funds for personal expenses, you contaminate that portion of the loan. The ATO treats the redrawn amount as a new borrowing for a private purpose, and the interest on that portion becomes non-deductible, even if the loan itself was originally used to purchase a rental property.
This is not a new rule. The ATO has been clear on this for years. But it catches investors who are not paying close attention, particularly when they have had the same loan for a long time and the redraw balance has built up.
The better approach is to keep your investment loan and personal finances completely separate. If you want to access equity from an investment property for personal use, structure it as a separate loan split and accept that the interest on that split will not be deductible. That way the investment portion stays clean.
To be honest with you, this is one of the most common structural errors I see. It is easy to overlook when you are busy, and lenders do not always flag it clearly when they are processing the paperwork.
Refinancing Fees and How They Are Treated at Tax Time
Refinancing is not free. You will typically face a discharge fee from your current lender ($150 to $400), a new loan application fee ($300 to $600), a property valuation fee ($200 to $400), and settlement costs ($200 to $500). These can add up to between $800 and $2,000 depending on your lender and the complexity of the transaction.
For investment properties, the ATO treats these costs as borrowing expenses. They are generally deductible, but not all at once. They need to be spread across five years (or the term of the loan if it is shorter than five years). If the total borrowing expenses are $100 or less, you can claim the whole lot in the year you incur them.
This is worth factoring into your break-even calculation. If it costs you $1,500 to refinance and you save $2,500 per year in interest, the break-even is less than a year. But you will only claim the refinancing costs at $300 per year for five years, not all at once. The savings are real; just make sure you account for both sides of the ledger.
Serviceability Buffers and What They Mean for Refinancing Investors
One of the more frustrating realities of the current lending environment is the serviceability buffer. Australian lenders are required to assess your ability to repay a loan at a rate roughly 3% above the rate you will actually be paying. This buffer exists to provide a cushion if rates move.
For investors, this creates situations where you are comfortably servicing your current loan but still struggle the serviceability test for a refinance, particularly if you have multiple properties or significant existing debt. I have spoken with investors who have been with the same lender for years, paying on time, never missing a repayment, only to find that switching lenders is harder than expected.
A few things worth knowing:
Some lenders assess existing debt at the contracted rate rather than applying the full buffer, when that debt is with the same lender or is an existing investment loan being maintained. Shopping around matters here, not just on rate but on how lenders assess your overall commitments.
Your borrowing capacity after a refinance will also affect your ability to purchase again. If you are drawing out equity and planning to use it for a future purchase, think through what happens to your overall position. There are some specific strategies covered in how to increase your borrowing capacity in Australia that are worth understanding before you begin.
And it is also worth thinking about your ownership structure, particularly if you are moving from holding one property individually to building a more substantial portfolio. Getting that wrong early can create problems later. Property investment ownership structures in Australia covers what scaling investors often get wrong on this front.
Using Refinancing Investment Property Equity to Scale
For investors who have been in the market a few years and have seen meaningful growth in their portfolio, refinancing is often the catalyst for the next purchase.
The basic approach: your property has grown in value, which means your usable equity has increased. You refinance, drawing out equity up to an 80% LVR to avoid Lenders Mortgage Insurance. That released equity becomes the deposit for your next property.
Done correctly, this is how a lot of serious investors go from one property to two, two to three, and so on, without needing large amounts of fresh savings. The key is making sure the structure is right from the start. That means keeping the loans for each property separate, making sure the equity you draw out is being used for an investment purpose, and understanding what the new debt does to your overall borrowing position.
And of course, the quality of the next property you buy with that equity matters enormously. There is not much point in releasing equity if it ends up going into a property that does not perform. Investment grade property in Australia is a good place to start if you want to understand what you are actually looking for.
A Note on Timing
Not every moment is the right moment to refinance an investment property in Australia. A few things worth considering:
If you are within the first year or two of a fixed-rate period, break costs can be significant. Get the actual figure from your lender before assuming a refinance makes financial sense.
If you are planning to purchase again in the next 12 months, a refinance now could affect your serviceability assessment at that point. Think about the sequencing carefully.
And if your property has not had a formal valuation recently, get a realistic sense of the current market value before you assume you have usable equity. Automated valuations and bank-ordered valuations can differ meaningfully. The bank valuation is what will determine your actual LVR.
None of these are reasons not to refinance. They are factors that affect timing and sequencing. And getting that sequence right is often what separates investors who scale smoothly from those who find themselves stuck.
Frequently Asked Questions
Is the interest on a refinanced investment property loan still tax deductible?
Yes, as long as the purpose of the loan remains the same. The ATO applies tracing rules based on what the borrowed funds are used for, not the security property. If you refinance to maintain the existing investment loan without drawing additional funds for personal use, the interest stays deductible. The complication arises when you draw out equity for non-investment purposes at the same time, as those amounts are treated as a separate, non-deductible borrowing.
How much does it cost to refinance an investment property in Australia?
Typical costs include a discharge fee from your current lender ($150 to $400), a new loan application fee ($300 to $600), a property valuation ($200 to $400), and settlement costs ($200 to $500). These borrowing expenses are generally tax deductible for investment properties, but must be spread over five years or the loan term (whichever is shorter) rather than claimed all at once, unless the total is $100 or less.
What happens if I use redraw on my investment property loan for personal expenses?
Using redraw on an investment loan for personal expenses contaminates that portion of the debt. The ATO treats it as a new borrowing for a private purpose, meaning the interest on the amount redrawn is no longer deductible, even though the original loan was taken out for an investment property. The cleanest way to avoid this is to keep separate loan splits for investment and personal purposes, so the two never mix.
How does refinancing affect my ability to buy another property?
Refinancing can affect your borrowing capacity in a few ways. If you draw out equity, your total debt increases, which affects serviceability calculations for future loans. Some lenders also assess your existing debt differently depending on whether it sits with them or with another lender. Before refinancing, it is worth modelling the effect on your overall borrowing position, particularly if you are planning another purchase within the next 12 to 18 months.
Key Takeaways: Refinancing Investment Property Australia
- Refinancing investment property in Australia can deliver real value through a better rate, equity release, or a cleaner loan structure, but the tax rules around it require careful attention.
- The ATO uses tracing rules to assess deductibility: what the borrowed funds are used for determines whether interest is deductible, not which property secures the loan.
- Drawing out equity for personal purposes at the same time as refinancing creates a mixed-purpose loan, with only the investment portion of the interest remaining deductible.
- Using redraw on an investment property loan for personal expenses contaminates that portion of the debt and removes the interest deduction on the amount withdrawn.
- Refinancing fees are deductible as borrowing expenses for investment properties, but must be spread across five years rather than claimed in full in the year they are incurred.
- Serviceability buffers mean refinancing can be more complex than expected for investors with multiple properties, and the timing relative to future purchases matters.
Refinancing Investment Property Australia: Final Thoughts
Refinancing is one of the most practical tools available to Australian property investors. A better rate improves your cash flow. Accessing equity funds your next purchase. A cleaner loan structure sets you up for the years ahead.
But the tax rules catch people out more often than they should. The ATO is clear on what is and is not deductible, and the costs of getting it wrong are real. A contaminated loan, a redraw used for personal expenses, an equity release with no clear separation between investment and personal use: these are the kinds of mistakes that cost investors money quietly, year after year, because no one notices until the accountant does the annual return.
I get it. When you are in the middle of a refinance and the lender is offering to top up your loan while they are at it, it feels like a smart move to take the extra cash. And it might be. But the structure has to be right, and you need to know in advance what you are doing with the money and how it will be treated at tax time.
And that is where most people come unstuck. Not in the refinancing itself, but in the planning that should happen before it.
If you are considering a refinance and want to think through how it fits into your broader investment strategy, that is exactly the kind of conversation we have with clients every day.
