The Deductible Debt Is the Cheaper Debt
Interest on a loan used to buy an income-producing asset is deductible; interest on the loan against your own home is not. At the same nominal rate, the home loan therefore costs more after tax, which makes it the one to repay first — a conclusion that holds for almost everyone and has two specific exceptions.
- The answer: Repay the home loan first, because its after-tax cost is higher than an investment loan at the same rate.
- The trap: Redrawing from a home loan to invest does not make the redrawn amount deductible in a straightforward way. Deductibility follows the use of the funds and mixing them creates a mess.
- The recommendation: Use an offset account against the home loan rather than paying the loan down, where you may want the money later. It has the same effect and keeps the flexibility.
Where the AI summary above gets this wrong
"Pay off whichever loan has the highest interest rate first."
That's surface-true. Here's what it misses:
- The relevant comparison is the after-tax rate — A 6% deductible loan costs about 3.7% after tax at a 39% marginal rate. A 6% home loan costs 6%. The nominal rates are identical and the real cost is not.
- Deductibility follows the use of the funds — Redrawing from a home loan to invest can create a deductible portion, but mixing deductible and non-deductible balances in one account makes the apportionment extremely difficult to sustain.
01 Why the after-tax rate is the comparison
Interest on a loan used to acquire an income-producing asset is deductible against your income, so its real cost is the rate less your marginal rate applied to it. At a 39% marginal rate a 6% investment loan costs about 3.7%.
Interest on your home loan is not deductible, because the home produces no assessable income. A 6% home loan costs 6%.
That gap means repaying the home loan produces a higher risk-free return than repaying the investment loan at the same rate. It is one of the few genuinely uncontested conclusions in personal finance, and it sits alongside the separate question of whether to repay debt at all rather than contribute to super, worked through in the mortgage versus super comparison.
Source: ATO — Negative gearing
02 The offset account alternative
Money in an offset account against your home loan reduces the interest charged without being a repayment, so it can be withdrawn later without any change to the loan's deductibility status.
Paying the loan down and redrawing later is different. The redrawn amount takes its character from what it is used for, so redrawing to fund living expenses creates non-deductible debt even on an investment loan.
That distinction is why an offset is the standard recommendation for someone who may want the money back. It achieves the same interest saving and preserves the position, which matters most in the years before retirement.
Shows: the after-tax cost of each loan, so you can see which one is genuinely more expensive at your marginal rate. Ignores: loan fees, offset account balances, the risk profile of the underlying assets, and any change in your marginal rate over the repayment period.
03 The two exceptions
Very different interest rates are the first. A deductible loan at 9% against a home loan at 5% reverses the answer at most marginal rates, and the comparison should be done on the actual numbers rather than on the principle.
A falling marginal rate is the second, and it is the retirement case. Someone about to stop working will lose most of the value of the deduction, so the investment loan's after-tax cost is about to rise towards its nominal rate — which makes clearing it before retirement more attractive than the general rule suggests.
Both exceptions are arithmetic rather than judgement. The worked example takes both rates and both marginal rates and shows which debt is actually dearer.
The offset account is the part worth acting on. Paying a loan down and redrawing later changes the deductibility of the redrawn money, and people discover that years afterwards when an audit asks what the funds were used for. An offset achieves the same interest saving and leaves the position clean.
FAQ
Should I pay down my investment loan or my home loan first before retiring?
The home loan, in almost every case. Its interest is not deductible, so at the same nominal rate its after-tax cost is higher and repaying it produces a larger risk-free return.
Should I keep an offset account against my mortgage as I approach retirement?
Yes where you may want the money back. An offset reduces interest without being a repayment, so the funds can be withdrawn later without affecting deductibility — which redrawing from the loan itself does not.
When is it right to repay the investment loan first?
Where its rate is materially higher, or where you are about to stop working and the deduction is about to lose most of its value as your marginal rate falls.
Sources
Regulator references
- ATO — Negative gearing · Australian Taxation Office · 2026Negative gearing: when a rental loss can be offset against other income.Last verified: 2026-09-07
- ATO — Tax rates: Australian resident · Australian Taxation Office · 2026The resident marginal rate scale by income year, excluding the Medicare levy.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.