Need some help with my situation as per below. Currently have a fixed loan on my ppor of $285K (property value $360K) with around $28K in redraw which brings the balance down to $257K. I am currently in the last stages of getting a loan for granny flat approved for $124K. Once the granny flat is built I will be living in that and renting out the house, the funds in redraw I will move into an offset against the new loan. From a tax perspective will the deductible interest be against the full $285K or will be against the $257K? I have read what Terry_w has wrote but I am not sure if this situation is different. Thanks for any input.