Home Equity Loan Interest? Here's How to Deduct It (2026)

You're a homeowner in Australia, juggling the responsibilities of managing your mortgage and home expenses. Perhaps you've taken out a home equity loan to fund a renovation, consolidate debt, or pay for your child's education. But with interest rates fluctuating, you might be wondering if there's any financial relief available to you. Specifically, can you deduct home equity loan interest from your taxes? Let's delve into the intricacies of this topic and explore how it could potentially benefit you in the current market landscape.

Understanding Home Equity Loan Interest

A home equity loan allows you to borrow against the equity in your home. The equity is the difference between your home's current market value and the remaining balance on your mortgage. Typically, these loans come with fixed interest rates and are repaid over a set term, similar to your primary mortgage.

Interest on home equity loans can be significant, especially with rates currently ranging from 6.49% to 12% in 2026, depending on your credit profile and the lender. It's crucial to understand whether this interest is deductible, as it could impact your financial strategy.

In Australia, tax deductions on home loan interest are generally reserved for investment properties, not personal residences. However, there are exceptions and nuances that could apply to your situation, particularly if the loan is used for income-generating purposes.

Key Information on Home Equity Loan Interest Deductibility

Understanding when you can deduct home equity loan interest is essential to making informed financial decisions. Here are the key factors:

• Purpose of the Loan: If the funds are used for investment purposes, such as purchasing a rental property or investing in shares, the interest may be deductible.
• Documentation: Keep thorough records of how the funds are used, as this will be crucial for claiming deductions.
• Consultation: Engaging with a tax professional can provide clarity specific to your circumstances.

Let's examine a comparison of typical scenarios:

Steps to Determine Deductibility of Home Equity Loan Interest

Follow these steps to ascertain whether you can deduct your home equity loan interest:

1. Identify the Purpose: Clearly define the purpose of your loan. Is it for personal use, or does it relate to generating income?
2. Gather Documentation: Collect all necessary documentation, including loan agreements, receipts, and statements that prove the use of the loan funds.
3. Consult a Tax Professional: Speak with a qualified tax advisor who can provide advice based on current legislation and your specific situation.
4. File Your Tax Return: If eligible, include the interest deduction in your annual tax return, ensuring all supporting documentation is readily available for review.

Tips and Considerations

Here are some expert tips to consider when dealing with home equity loans:

• Review Current Interest Rates: In 2026, interest rates for home equity loans can vary. Regularly review your rate and consider refinancing options if rates decrease significantly.
• Utilise Professional Advice: Given the complexity of tax laws, professional advice is invaluable. An experienced mortgage broker, like those at Esteb and Co, can help you navigate these waters.
• Plan for the Long Term: Consider how taking out a home equity loan affects your long-term financial goals. Ensure it aligns with your broader strategy of wealth accumulation or debt reduction.
• Monitor Legislation Changes: Tax laws can change, affecting deductibility rules. Stay informed or seek advice regularly to ensure compliance and maximise benefits.

Frequently Asked Questions

1. Can I deduct home equity loan interest if I use it for personal expenses?
   No, interest on loans used for personal expenses is generally not deductible.
2. Is interest on a home equity loan deductible for investment property renovations?
   Yes, if the loan is used for renovating an investment property, the interest may be deductible.
3. How do I prove the purpose of my home equity loan?
   Maintain clear records, including receipts and loan documentation, to demonstrate the use of funds.
4. Are there specific lenders who offer better rates for home equity loans?
   With access to 83+ lenders, Esteb and Co can help you find competitive rates tailored to your needs.
5. What should I do if I'm unsure about my loan's deductibility?
   Consult a tax professional who can provide guidance based on your situation and current laws.
6. Can changes in tax legislation affect my ability to deduct interest?
   Yes, tax legislation can change, so staying informed is crucial to maintain compliance and optimise deductions.