The Reserve Bank of Australia’s cash rate cycle may have stalled, but for self-employed borrowers the most significant regulatory shift in a decade took effect on 1 October 2024. On 12 July 2024 the Australian Prudential Regulation Authority (APRA) announced it would scrap the 3‑percentage‑point serviceability buffer that had been in place since October 2021, reverting to a 1‑percentage‑point overlay above the loan product rate. In the alt‑doc and low‑doc sectors, where declared income already faces a haircut, the thinner buffer recalibrates how much a sole trader, contractor or company director can realistically borrow. Yet a deposit remains the hardest piece of the puzzle. Non‑bank lenders that once readily approved cash‑out equity releases have tightened purpose‑declaration rules and capped cash‑out at $50,000 on low‑doc facilities. Against that backdrop, pulling redraw from an existing home loan has emerged as a cleaner, policy‑aligned way to generate a deposit without triggering a fresh credit application, a separate valuation or the serviceability head‑winds of a new cash‑out advance. The mechanics are simple, but the policies of specialist lenders such as Pepper Money, La Trobe Financial, Liberty, Bluestone and Brighten vary in detail, and the tax implications can turn a straightforward deposit raid into a long‑term restructure of deductible and non‑deductible debt.
The Deposit Logic: How Redraw Works in a Low‑Doc Context
A redraw facility lets a borrower re‑borrow principal they have already paid ahead of schedule. On an owner‑occupier loan with a balance of $400,000 and $120,000 in redraw, the borrower can transfer that $120,000 to a transaction account without needing a fresh approval — the loan limit does not change, only the drawn balance. In a low‑documentation purchase scenario, this cash can then be held in a savings or offset account for 90 days so that it satisfies the ‘genuine savings’ requirements most non‑bank lenders impose. The deposit source is verifiable through loan statements; it is not contingent on the sale of another property, so there is no need for a simultaneous‑settlement clause. And because no new credit application is lodged for the redraw itself, the borrower’s serviceability assessment for the next property is run only on the new purchase loan and the higher drawdown balance of the existing facility.
This route avoids the complexity that often derails equity‑release deals under specialist lending. A cash‑out refinance on a low‑doc product typically requires a full independent valuation, a minimum 70‑75% loan‑to‑valuation ratio (LVR) cap on the cash‑out component, and a declaration of the purpose of the funds. Underwriters will often refuse cash‑out if the stated purpose is a deposit for a further property, preferring the borrower to use a separate deposit‑bond or simultaneous‑settlement structure. Redraw, by contrast, is a facility the borrower already owns; it is not a new advance assessed under cash‑out policy.
The strategy is most effective when the redraw balance has accumulated over several months from surplus income. Lenders scrutinise the trail to confirm the balance is not the result of a single recent external pay‑in — a pattern that would suggest the money was borrowed elsewhere and parked temporarily. Statements showing regular tax‑paid earnings flowing into the loan account, followed by redraw during a quiet revenue quarter, tell the story underwriters want to see.
Genuine Savings and the 3‑to‑6‑Month Rule
Most non‑bank low‑doc credit guides require that any deposit funds classified as genuine savings have been held in a verifiable account for at least three months. La Trobe Financial’s Specialist Lending Product Guide (April 2024) states that “funds sourced from an existing redraw facility are acceptable as genuine savings provided the borrower can demonstrate that the redraw balance has accumulated over a minimum of three months and the funds are not the result of a recent external pay‑in.” Liberty Financial applies a similar rule but will accept a shorter seasoning period if the redraw transaction history shows a steady build‑up over two business quarters. Bluestone and Brighten ask for six months of loan statements showing the redraw balance and the subsequent withdrawal. Pepper Money is slightly more flexible when the redraw is drawn from an existing Pepper loan, but still requires 90 days of post‑redraw statements on the savings account where the funds are held for the next purchase.
Documentation to Prepare Before You Approach a Lender
Self‑employed applicants should compile:
- Six months’ loan statements from the existing facility, highlighting the redraw balance accumulation.
- The redraw withdrawal confirmation, showing date and amount.
- The bank statement of the account receiving the funds, demonstrating the deposit has been untouched for the required seasoning period.
- A letter from the existing lender confirming the redraw facility limit and that no new lending approval was required (Pepper and Resimac often ask for this when the existing loan is with another institution).
- A brief statutory declaration that the redrawn funds are not from a borrowed source — particularly useful if a large lump sum was repaid into the loan shortly before the redraw.
Lender‑by‑Lender Treatment of Redraw as a Deposit
Pepper Money: Own‑Loan Redraw Preferred
Pepper’s alt‑doc credit policy (effective 1 March 2024) draws a distinction between redraw extracted from a Pepper‑administered loan and redraw from a third‑party lender. When the existing facility is with Pepper, the redraw balance can be used as a deposit without any additional serviceability test, provided that the loan has been conducted for 12 months and the redraw amount does not exceed 80% of the total available redraw. If the facility is held elsewhere, Pepper will still accept the funds as genuine savings but requires a full transaction history and may ask the borrower to place the money in a term deposit for 60 days before settlement. The maximum LVR on the new purchase sits at 80% for full‑doc‑light income‑declaration products; for accountant‑letter‑only loans, the cap is 75%.
La Trobe Financial: The Seasoning Requirement
La Trobe’s April 2024 Specialist Lending Product Guide treats redraw as a “verified deposit source” rather than a contingent deposit. The redraw must have been available for at least 90 days, and the borrower must not have reduced the redraw balance through a subsequent repayment in that period. La Trobe will fund up to 80% LVR on the new purchase when the deposit comes entirely from redraw, provided the total debt‑to‑income ratio (DTI) stays below 9 and the borrower’s declared income can service both loans at the assessment rate. The guide further clarifies that redraw from a loan secured by an investment property can be used for the deposit on another investment purchase without cross‑collateralisation, making it a popular choice among property investors using self‑employed loan structures.
Liberty Financial: Broad Acceptance and Flexible Serviceability
Liberty’s self‑employed credit policy, updated 1 February 2024, accepts redraw from any authorised deposit‑taking institution as genuine savings. The key requirement is a letter from the outgoing lender confirming the redraw amount and that no arrears exist. Liberty’s serviceability model allows the redrawn balance on the existing loan to be assessed at the actual pay rate — not the higher assessment rate — because the facility already existed before the new application. This nuance can improve borrowing capacity materially. For example, on a $100,000 redraw that pushes the existing loan balance to $500,000, Liberty may test the $500,000 at the lower pay rate of 6.29% p.a. while the new $600,000 loan is assessed at the buffer‑adjusted 7.29% p.a., lowering the blended servicing obligation compared with a cash‑out structure where both loans would be stress‑tested at the full assessment rate.
Bluestone and Brighten: Documentation Cross‑Check
Both Bluestone and Brighten are comfortable with redraw as a deposit source but demand a paper trail that can withstand an AFCA complaint — though this article does not deal with dispute resolution, the lenders’ caution shapes their requirements. Bluestone’s alt‑doc guide (15 January 2024) specifies that the redraw funds must appear in the borrower’s nominated savings account for at least 30 days before unconditional approval. Brighten’s October 2023 product note adds that if the redraw is taken from a facility that is not in the borrower’s own name (for example, a company‑titled property where the borrower is a director), the lender will treat the amount as a gift and require a formal gift letter. This can inadvertently trigger the need for a guarantor and extra serviceability checks.
Serviceability Arithmetic after APRA’s Buffer Cut
APRA’s 12 July 2024 announcement removed the 3% buffer, and the new 1% buffer landed on 1 October 2024. For a low‑doc loan priced at a standard variable rate of 6.29% p.a., the assessment rate falls from 9.29% p.a. to 7.29% p.a. The monthly repayment factor on a 30‑year principal‑and‑interest loan at 9.29% is approximately $8,250 per $1 million borrowed; at 7.29% it is $6,865 per $1 million. The difference of $1,385 per $1 million of debt directly expands borrowing capacity.
Consider a director of a plumbing company who declares $180,000 per annum via an accountant’s letter. The borrower already holds an owner‑occupied home loan with a current balance of $400,000 and $100,000 in redraw. To buy a second property valued at $750,000, they plan a 20% deposit of $150,000, comprised of the $100,000 redraw and $50,000 in other savings. After redraw, the existing loan balance rises to $500,000; the new loan will be $600,000. Total debt is $1,100,000.
Under the old 9.29% assessment rate, monthly repayments on $1.1 million would be $9,075. After adding a living‑expense benchmark of $2,200 per month, the borrower needs net income of $11,275 — roughly $135,000 per annum — which would leave a slim surplus on a declared $180,000 if the lender discounts the declared income by 20% (common on accountant‑letter deals). Under the lower 7.29% assessment rate, the monthly repayment drops to $7,552, and with the same living expenses total servicing obligation is $9,752, equivalent to $117,000 per annum. Even with a 20% income shade, the loan becomes clearly serviceable.
This recalibration does not eliminate DTI caps. Bluestone imposes a hard DTI limit of 9 on self‑employed loans, Liberty 9, Pepper 8 on certain low‑doc products, and Resimac 8.5. In the example above, total debt of $1,100,000 against gross declared income of $180,000 yields a DTI of 6.1, leaving headroom for further debt. A borrower who would have breached servicing under the old buffer now clears it and remains well inside the DTI envelope.
Tax Deductibility: Turning Non‑Deductible Debt into Deductible Debt
When a self‑employed borrower redraws from an owner‑occupied loan and uses the money as a deposit on an investment property, the interest on the redrawn portion becomes tax‑deductible from the moment the funds are applied to the income‑producing asset. This is a pure application of the purpose test in section 8‑1 of the Income Tax Assessment Act 1997: if the borrowed money is used to acquire a rental property, the interest is incurred in gaining or producing assessable income. The same principle allows a borrower to redraw from an existing investment loan to fund the deposit on a further investment property, maintaining full deductibility across both facilities.
The ATO’s long‑standing view is that a redraw is a new borrowing for tax purposes, meaning the original loan’s purpose does not automatically carry over. Documenting the flow of funds is critical. The borrower should:
- Transfer the redraw amount directly to a transaction account that is used solely for the property purchase.
- Pay the deposit and stamp duty from that account on the same day where possible.
- Keep a clear audit trail of the settlement statement linking the deposit to the property contract.
- Obtain a loan variation letter from the existing lender that records the redraw and the applicable interest rate for the newly drawn balance, helping the accountant apportion interest if the loan is later used for mixed purposes.
A common trap is a redraw from an owner‑occupied loan where part of the redrawn amount is used for the deposit and part is used to pay down a business overdraft. In that case only the proportion applied to the income‑producing asset generates deductible interest; the remainder is private. Self‑employed borrowers with interlinked business and personal finances should quarantine the redraw inside a dedicated purchase account and avoid any temptation to sweep leftover funds back into the business.
The tax leverage also works in reverse. If an existing investment loan has an available redraw and the borrower uses it for a principal place of residence deposit, the interest on that portion will be non‑deductible. The ATO’s compliance focus on mixed‑use loans has sharpened, so structuring the facilities with clear splits — or using offset accounts instead of redraw — may be preferable for those likely to oscillate between investment and owner‑occupied debt.
Avoiding Common Pitfalls
Cash‑Out Reclassification Risk
Non‑bank lenders can reclassify a redraw as a cash‑out if the funds are not adequately seasoned or if the borrower draws down and immediately applies for a new mortgage. This reclassification can push the deal into higher‑risk pricing, a lower maximum LVR or an outright decline. To avoid it, maintain the redraw in a savings account for at least the lender’s stipulated seasoning period and do not start the new application until the paper trail is complete.
Cross‑Collateralisation Traps
Brokers sometimes propose cross‑collateralising the existing property with the new purchase as a way to increase the deposit. Under a low‑doc policy, cross‑collateralisation often forces both properties to be valued simultaneously and ties the borrower to a single lender. If the redraw path is taken instead, the deposit comes from a separate facility, the existing loan remains standalone, and the new property is secured by its own mortgage. This preserves flexibility for future refinancing and loan‑splitting.
LMI Loading on Redraw‑Funded Deposits
Lenders’ mortgage insurance premiums on low‑doc loans are already higher than on full‑doc deals. When a redraw‑funded deposit sits below 20% of the purchase price, LMI will apply, and the premium is capitalised. If the redraw is drawn from a loan that already carries LMI, the additional borrowing may also push that existing loan above 80% LVR, triggering a top‑up premium. Self‑employed borrowers should calculate the total LVR on each facility after the redraw and the new purchase before committing, and consider whether a small top‑up from genuine