Borrowing against your home for the business: can you claim the interest?

Usually, yes. In New Zealand the tax test for loan interest is about where the money goes, not where it comes from. A loan secured on your family home that’s spent on the business generally gives you deductible business interest. Spend part of it on a new deck and that share isn’t deductible. And only interest counts — never the principal.

That’s the short version. The longer version matters because the same house can carry three very different kinds of interest, and mixing them up is one of the most common errors owners make in their first year of borrowing against property.

Does it matter that the loan is secured on my home?

Not for tax. Inland Revenue’s own guidance on rental expenses makes the point from the other direction: you can’t deduct interest on “money borrowed for a purpose other than financing your rental property, even if the rental property is used as security for the loan” (IRD rental property expenses).

Flip that around and you have the rule that matters here. The security is just the lender’s safety net. The use of the money decides the tax treatment. A business loan secured on your home is still a business loan if the money is spent in the business.

Which interest on my home can I actually claim?

Here’s where owners get tangled. One property can generate three different interest bills:

1. Your ordinary home loan

This bought the house you live in. It’s private, so the interest isn’t deductible — unless you run the business from home. Then you can claim a portion. Inland Revenue says you can “claim a portion of your mortgage interest (but not the principal)” when part of your home is used for the business (IRD home office expenses). The share is normally worked out by floor area.

2. A loan secured on the home and spent on the business

A second mortgage or top-up that funds equipment, stock, wages or a fit-out. The interest on this borrowing is generally deductible in full against business income — no floor-area apportionment, because the money itself went into the business.

3. A loan secured on the home and spent on both

A single top-up that pays for a new ute and a family holiday. You can only claim the business share. This is the one that causes the most grief at year end.

Rule of thumb: apportion the home loan by floor area; apportion business borrowing by what the money bought.

Where the square metre rate fits

If you use Inland Revenue’s simplified square metre method for your home office, it doesn’t swallow your mortgage interest. IRD set the rate at $57.30 per square metre for the 2026 income year (1 April 2025 to 31 March 2026), and the rate excludes premises costs — mortgage interest, rates and rent are still claimed separately on the business proportion (IRD square metre rate 2026).

How do I work out the deductible share?

For business borrowing, the maths is straightforward:

Deductible interest = total interest × (amount used for business ÷ total amount borrowed)

And the number that tells you what the loan really costs you:

After-tax cost of interest = interest × (1 − your marginal tax rate)

The marginal tax rate is the rate you pay on your top dollar of income. For individuals, from 1 April 2025 the brackets are (IRD tax rates for individuals):

Companies pay a flat 28%.

So every $1,000 of deductible interest costs a sole trader in the 33% bracket about $670 after tax, and a company about $720. Private interest costs the full $1,000. Same loan, same house — very different real cost.

A worked example: an electrician in Hamilton

This is an illustrative example, not a real client, and the interest figures are made up to show the maths.

Aroha is a sole-trader electrician in Hamilton. Her home is worth about $850k with a $400k bank mortgage. She has the chance to take on a commercial fit-out contract but needs a second van, test gear and working capital for the first two months of wages. Her bank top-up stalls on the paperwork, so she takes a $150k second mortgage over the home.

She spends it like this:

Business share: $130k ÷ $150k = 86.7%.

Suppose the interest charged over the year is $15,000. Then:

• Deductible interest: $15,000 × 86.7% = $13,000
• At her 33% marginal rate, that saves about $4,290 of tax
• After-tax cost of the business borrowing: $13,000 − $4,290 = $8,710
• The $2,000 of interest on the home improvements is private and stays fully hers

Aroha also works from a dedicated office that’s 10% of the home’s floor area, so she can separately claim 10% of the interest on her original $400k mortgage as a home office expense. Two different claims, two different methods — and her accountant needs both numbers.

Notice what made this easy: she knew exactly where every dollar went because the second mortgage was a separate loan, drawn for a stated purpose. If she’d drawn it from a revolving credit facility she also used for groceries and school fees, working out the business share would have been far harder.

Know roughly how much equity you’ve got and what the business needs? Start a 60-second enquiry and we’ll walk through the options that fit.

What goes wrong most often?

• Mixing business and private spending on one revolving facility. Every deposit and withdrawal changes the balance, so tracing the business share becomes guesswork. A separate account for business borrowing removes the problem.
• Claiming the principal. Repayments are part interest, part principal. Only the interest is an expense. If the money bought equipment, the asset itself may be depreciated — see our guide to depreciation and buying equipment before 31 March.
• Claiming the whole home loan because you work from home. A home office gives you a floor-area share of the ordinary mortgage, not all of it.
• Forgetting the purpose changes when the money moves. If you later pull business funds back out for private use, the deductible share can change with it.
• Borrowing personally for a company without a plan. If you own the house and the company runs the business, the cleanest setup is often for the company to be the borrower with your home as security. If you borrow personally and pass the money on, get your accountant to set up how that’s recorded before drawdown, not at year end.
• Expecting GST back on the interest. There’s no GST on interest, so there’s nothing to claim in your GST return.

Some uses sit in a greyer area — borrowing to pay a tax bill, buy out a partner or fund a shareholder’s drawings, for example. Those can be perfectly sensible decisions, but the tax treatment depends on the detail, so run it past your accountant first.

Does the residential interest limitation rule affect business loans?

Owners who remember the 2021–2025 limits on rental property interest sometimes worry their business loan is caught. Those rules targeted interest on borrowing used to finance residential property, not business-purpose borrowing that happens to be secured on a house. They’ve also been unwound: Inland Revenue confirms you can claim 100% of interest incurred from 1 April 2025 on residential rental borrowing (IRD changes to the interest limitation rules). For business borrowing, the use-of-money test above is the one to apply.

A record-keeping checklist

Keep these in the business file from day one and year-end becomes a ten-minute job:

1. The loan agreement showing the amount, the borrower and the stated purpose.
2. A one-page use-of-funds schedule — what each dollar was spent on, with invoices.
3. The annual interest statement from the lender.
4. Your floor-area calculation for any home office claim, and the ordinary mortgage interest statement.
5. A note of any later changes — money moved back out, a loan restructured, a property sold.

Your accountant will usually also want establishment and legal costs listed separately, because the costs of arranging business borrowing are handled as part of the borrowing rather than as everyday expenses.

How does this change the borrowing decision?

The tax deduction doesn’t make a loan worth taking — the business case has to stand on its own. But it does change the real cost, and it should change how you structure things:

• Borrow only what the business needs. Mixing a renovation into a business top-up muddies the tax and inflates your combined LVR. Our LVR guide shows why that matters to a lender.
• Use a separate loan, not the home redraw. A dedicated business loan keeps the tax clean and the exit clear.
• Compare options on after-tax cost. A deductible business loan and an undeductible private one are not like-for-like, even at the same price.
• Check your equity first. The property equity estimator gives you a rough read in a minute, and our guide to borrowing against property with an existing mortgage explains how a second mortgage sits behind your bank.

If you’re weighing whether to use property at all, secured vs unsecured business loans sets out the trade-offs.

Putting your home’s equity to work, cleanly

Lots of New Zealand owners have real equity in the family home and a business that could use it — and the tidiest way to do that is a separate, clearly business-purpose loan. That’s exactly what property-secured business loans through Loanster are: $20,000 up to $1m, as a first or second mortgage over NZ property, with your existing home loan usually left untouched. No financials or tax returns are needed for the first assessment, and in some cases funds land within 24 hours of approval.

Here’s what to expect when you get in touch:

• About 60 seconds to enquire, with no credit check when you first enquire.
• Your details aren’t sent to a pile of lenders. No spray-and-pray, no phone ringing with strangers.
• A real person looks at your property, your existing mortgage and what the money’s for, then calls you to talk it through.
• Fill the form in accurately, please — a realistic property value, the actual mortgage balance and the true purpose let us find the right fit first time.

See if you qualify →