Hi Frosty

I think the key is what’s the purpose of loan when borrowed. As you said it’s to finance your wife’s house so she can claim 100%.

If you want to make more logical for tax department that also will not effect in income tax either to you or  your wife.
Your wife can claim 100%interest, pays 50% interest to you and 50% to bank. In your income tax return you can declare income of interest you get from your wife and expenses of interest you pays to bank.

But still check with your accountant.

Yugraj
New Zealand