How to Pay IO on a PI loan Recently the rules of the game have changed with many lenders increasing the interest rates on Interest Only (IO) loans. This makes it more attractive, in one sense, to take out Principal and Interest (PI) loans but the problem is that if you pay PI on an investment property you are diverting funds from paying down non deductible debt to paying down deductible debt. This means you will have less deductions which means you will pay more tax - over the years this would be considerable. Generally it may be better to cop a higher rate and go IO - at least until you would pay off all your non deductible debt. But there is a potential strategy to have your cake and eat it too. A person could borrow to pay the capital part of the PI repayment. Another IO loan could be set up separately to the main PI loan. This would probably have a higher interest rate - but if this is a LOC loan some lenders have lower rates for these compared with IO loans. Anyway, repayments for the main PI loan could be taken from this separate IO loan and then the borrower could pay the interest component of the main PI loan so that the IO loan is only increasing by the capital component and there will be no capitalising of interest. So far as I am aware no one has considered this before - I would patent it, but you cannot patent a strategy. Therefore there is no ATO guidance on how they would consider it. However under general tax law the interest would be deductible on both loans, with the only question being would the ATO see it as a scheme with a dominant purpose of increasing tax deductions. Anyone contemplating this should seek tax advice and consider a private binding ruling.