Claim Interest on Home Equity Loans? Maximize Deductions (2026)

With the cost of living on the rise and many Australians seeking ways to manage their finances more effectively, home equity loans have become an attractive option. But a question that often arises is whether you can claim interest on a home equity loan. Understanding the tax implications and benefits of these loans can help you make informed decisions that align with your financial goals.

Understanding Home Equity Loans

A home equity loan, commonly referred to as a second mortgage, allows you to borrow against the equity you have built up in your home. This type of loan can be used for various purposes, such as home improvements, consolidating debt, or funding significant expenses like education or medical bills. The key advantage is that home equity loans typically offer lower interest rates compared to unsecured loans, as they're secured against your property.

In Australia, the interest on a home equity loan may be tax-deductible, but this largely depends on how the borrowed funds are used. If the loan is used for investment purposes, such as purchasing a rental property or investing in shares, the interest may be deductible. However, if the funds are used for personal expenses, the interest is generally not deductible.

Current Market Rates and Options

As of 2026, home equity loan rates in Australia generally range from 6.49% to 12%, depending on the lender and the borrower's financial profile. It's crucial to shop around and compare different options to ensure you're getting the best deal. At Esteb and Co, we work with over 83 lenders, providing a diverse range of options to suit various financial situations.

When considering a home equity loan, it's essential to evaluate the terms and conditions, such as fees, loan tenure, and repayment flexibility, in addition to the interest rate.

Steps to Claim Interest on a Home Equity Loan

Claiming interest on a home equity loan involves specific steps and adherence to tax regulations:

1. Determine the Purpose: Clearly define the purpose of the loan. If used for income-generating investments, the interest may be deductible.
2. Maintain Accurate Records: Keep detailed records of how the loan funds are used, as this will be crucial for substantiating your tax deduction claims.
3. Consult a Tax Professional: Engage with a qualified tax advisor to ensure compliance with the latest tax laws and maximise your deductions.
4. File Your Tax Return: Include the interest paid on your home equity loan in your annual tax return under the appropriate section.
5. Review Annually: Regularly review your loan and tax situation to ensure ongoing compliance and optimisation of your financial strategy.

Expert Tips and Considerations

Here are some expert tips to keep in mind when dealing with home equity loans:

• Assess Your Financial Situation: Before applying, evaluate your financial health to ensure you can meet the repayment obligations comfortably.
• Consider Long-Term Implications: While home equity loans offer immediate access to funds, they also increase your debt level, which could impact future financial flexibility.
• Stay Informed: Tax laws can change, so stay updated on any modifications that may affect your ability to claim interest deductions.
• Leverage Professional Advice: Utilise the services of mortgage brokers like Esteb and Co to explore a wide range of options and find a loan that best suits your needs.
• Plan for Interest Rate Changes: Prepare for potential interest rate fluctuations, especially if opting for a variable rate loan.

Frequently Asked Questions

1. Can I claim interest on a home equity loan used for renovations? Interest on a home equity loan used for renovations is not typically deductible unless the renovations increase the rental yield of an investment property.
2. Is there a limit on how much interest I can claim? There’s no set limit, but you can only claim interest on the portion of the loan used for income-producing investments.
3. How do I prove the loan was used for investment purposes? Maintain comprehensive documentation, including bank statements and invoices, to substantiate your claims.
4. What happens if I use the loan for mixed purposes? You’ll need to apportion the loan and only claim the interest related to the investment portion.
5. Can interest on a home equity loan be claimed on a primary residence? If the loan is used for investment purposes tied to your primary residence, such as building a rental unit, a portion may be deductible.
6. Are there any other tax benefits of home equity loans? Beyond interest deductions for investment purposes, consult a tax advisor for any other applicable benefits.
7. How can Esteb and Co assist me? Esteb and Co offers access to a variety of lenders, ensuring you find a home equity loan with favourable terms tailored to your financial situation.