Introduction: Understanding Mortgage Interest Deductions in Australia in 2026
A mortgage interest deduction is not automatic for every homeowner. It covers the interest charged on money borrowed to earn assessable income, such as rent. It has nothing to do with how low or high your advertised rate is.
Plenty of owners get this wrong. The ATO's top rental errors list includes incorrect interest apportionment, and the ATO has said 9 out of 10 rental owners were getting returns wrong in an earlier year.
This guide covers eligibility, private versus income-producing use, apportionment, refinancing, records and claiming for the 2025-26 year (1 July 2025 to 30 June 2026). It is general information only. Check current ATO guidance before you lodge.
Key Takeaways
- Interest on a purely private home is generally not deductible; interest on a rental loan generally is.
- What you did with the borrowed money matters more than which property secures the loan.
- Redraws, refinancing and part-rental use need apportionment and records.
- Keep loan statements, rental records and evidence of how funds were used.
Mortgage Interest Deduction: Core Australian Rules for 2026
Mortgage interest is the cost a lender charges for the borrowed money. It is separate from:
- Principal repayments, including extra payments that reduce the balance
- Private household costs
- Borrowing fees, which follow their own rules
- The interest rate, which is only the figure used to calculate that charge
Under section 8-1 of the ITAA 1997, an expense is generally deductible if you incur it in gaining or producing assessable income. Private or domestic expenses and capital outlays are excluded.
Timing matters too. An outgoing is generally incurred when you owe a present, unavoidable debt, even if you haven't paid it yet.
Borrowing fees (establishment, valuation) above $100 are generally spread over five income years or the loan term, whichever is shorter. At $100 or less, you can deduct them immediately.
Income-producing property versus private property
Interest linked to a rental property may be deductible. Interest linked solely to your own home is not.
Owning an investment property doesn't make every borrowing cost deductible. The test is what the loan proceeds were used for.
Current ATO guidance sits alongside those use-of-funds rules:
- TR 2026/1 (issued 20 May 2026) replaces IT 2167 and covers rental income, deductions and private-use boundaries
- PCG 2026/2 sets out apportionment compliance guidance
Negative gearing reforms are now law but apply from 1 July 2027, so they do not change your 2025-26 claim.
Individuals, companies, trusts, partnerships and non-residents can be taxed differently, so treat this as a starting point.
Who Can Claim Mortgage Interest in Australia?
Four things drive eligibility:
- You carry the legal obligation to pay the interest
- The borrowed funds were used for an income-producing purpose
- The interest connects to assessable income
- The expense was incurred in the relevant period
The ATO's example of Simone shows this. She owns the property alone, signed an agreement making her fully liable, and pays from her own account. That supports a 100% claim.
Rental and investment properties
Interest on money borrowed to buy, maintain or improve a rental property may be deductible. Eligible uses include:
- Buying the property
- Buying rental assets
- Paying deductible rental expenses
- Financing renovations
Vacant or between tenants. The property must be genuinely available for rent. That means broad advertising and realistic conditions. An excessive asking rent or unjustified refusals of tenants suggest otherwise.
Vacant land. Section 26-102 generally denies holding-cost deductions from 1 July 2019. In the ATO's John example, construction-financing interest on a townhouse can be claimed, but land-purchase interest cannot until the land is no longer vacant.
Mainly private holiday homes. TR 2026/1 applies section 26-50. Carla's mainly family-use beach house produces assessable rent, but losses and outgoings are denied. The ATO's transitional approach covers expenses before 1 July 2026.
Owner-occupied and private-use homes
Interest on a loan used solely for a private family home is not deductible, even if the property rises in value.
Part-income use changes this. Renting a room can support an apportioned claim, and the ATO counts actual rental days as the income-producing days for a room in your home. Occasional working from home does not create a deductible place of business.
Loan purpose versus property security
Zac and Lucy moved into a new home and kept their original home as a rental. Of their borrowings, $25,000 relates to the rental and $400,000 funded the new private home, secured against the old one.
- The $25,000 interest can be deducted
- The $400,000 interest cannot, even though the rental secures it
Use controls the result, not security.
How to Calculate and Apportion the Mortgage Interest Deduction
Start with the interest actually charged or incurred in the tax period, taken from your lender statements. Don't use the original principal or the advertised rate.
Apportioning mixed-use loans
The ATO's Yoko example shows the method. Of a $400,000 loan, $380,000 funds a rental property and $20,000 funds a private car, so $33,250 of $35,000 interest is deductible (95%).
Tyler's case adds a redraw. A $9,500 private redraw lifted his loan to $365,000, and apportionment left $18,748 of the $19,000 interest deductible.
Separate loan splits make tracing easier, but account structure alone does not change the purpose of the borrowing. Repayments also cut the private and income-producing parts proportionately. You can't simply declare that repayments went only to the private portion.
Redraws, refinancing, and loan restructuring
- Refinancing. Where a new loan replaces an eligible one, interest on the replacement can remain deductible. Any extra amount borrowed must be traced to its own use.
- Redraws. A private redraw from an investment loan creates a mixed-purpose debt needing ongoing apportionment (TR 2000/2).
- Debt consolidation. Combining private and income-producing debt leaves a mixed account.
- Offset accounts. The deduction can't exceed the reduced interest actually incurred.
- Capitalised interest. TR 2000/2 excludes these facilities, and TD 2012/1 says Part IVA can deny interest under some investment-loan arrangements.
Changes in property use
Deductible proportions shift when a property moves between private use, rental, vacancy, renovation and sale preparation. Keep records for each period.
PCG 2026/2 accepts time-based, area-based or combined methods for property-use apportionment. That step is separate from loan-purpose apportionment.
Work through apportionment in this order:
- Identify the purpose of each borrowing
- Confirm interest for the tax period
- Separate income-producing and private components
- Apply any time or use apportionment
- Keep your working papers
How to Claim It and Keep ATO-Ready Records
On the 2026 individual supplementary return, rental interest goes at question 21, label Q, for your share. In myTax, the Rent section uses the wording "Interest on loans". Confirm current labels before lodging.
Documents to collect
- Annual and periodic lender statements
- Loan contracts and settlement documents
- Refinance statements and redraw histories
- Property-management statements and tenancy agreements
- Rental income records and evidence of property use
- Your apportionment calculations and notes on changes in use
The 2026 rental guide says to keep records for five years from 31 October, or from lodgment if later. Disputes, and some loss or CGT records, can extend that period.
Filing and review process
- Confirm who the legal borrower is on the loan documents
- Identify the purpose of each borrowing (investment versus private)
- Reconcile lender interest figures to the tax-year period
- Calculate any private-use adjustment before you claim
- Enter only the supported amount at the correct label
- Keep the source documents for the full retention period
VJM Global supports Australian businesses, foreign investors and property owners with tax compliance, accounting records and reviews of complex cross-border or mixed-use borrowing.
Common errors to avoid
- Claiming principal repayments
- Treating all interest as deductible when the loan has private use
- Relying on the property as security alone
- Claiming without evidence of the loan's purpose
- Double claiming the same cost under another category, or through another taxpayer or entity
Common Scenarios, Pitfalls, and 2026 Planning Considerations
Negative gearing. If rental income falls short of deductible expenses including interest, the net rental loss may reduce other assessable income. Results vary by person. ATO data for 2023-24 shows 2,335,540 individuals with rental interests, of whom 1,266,454 reported a net rental loss.
From 1 July 2027, new rules limit negative gearing to new builds, with an exemption for properties held at 7:30pm AEST on 12 May 2026.
Complex cases deserve professional review:
- Joint ownership. Income and expenses follow legal interests, such as 75/25 for tenants in common. Separate borrowing liability also matters.
- Companies and trusts. Company losses carry forward under their own tests. A trust cannot distribute its loss to beneficiaries.
- Non-residents. Australian rental income must be declared. Interest paid to a foreign lender can trigger withholding, and section 26-25 can deny the deduction if required withholding fails.
- Foreign-currency loans. Section 960-50(6) governs translation of the expense, separate from Division 775 foreign exchange gains and losses.
- Property and business funding. Trace each use separately.
2026 year-end checklist
- Download complete loan statements
- Document changes in occupancy or tenancy
- Reconcile rental income and expenses
- Review loan splits and redraws
- Check whether ATO guidance has changed
Frequently Asked Questions
What is the tax deduction for interest?
The deductible amount is the interest tied to an eligible income-producing purpose, adjusted for any private or mixed-purpose use. Your circumstances matter, so check current ATO guidance.
Can I claim mortgage interest on my main residence in Australia?
Interest on a purely private home loan is generally not deductible. If part of the property or borrowing earns assessable income, such as a rented room, that portion may be claimable.
Is mortgage interest deductible on a rental property?
Generally yes, where the borrowing was used for the rental. Check the loan purpose, who owns the property, timing, and any private-use periods.
How do I apportion interest when a property is partly rented or a loan has mixed use?
Divide interest by the income-producing and private use of the loan or property. Support the split with contemporaneous records and a defensible calculation.
Can I claim mortgage interest after refinancing or redrawing a home loan?
Not automatically. Trace the replacement or additional funds to their actual use. Replacement income-producing debt may stay deductible, while a private redraw is not.
What records does the ATO require to support a mortgage interest deduction?
Keep lender interest statements, loan and settlement documents, redraw or refinance records, rental evidence and your apportionment calculations.
