A plan participant takes a 401(k) loan to purchase a house. When is the interest deductible? A plan participant takes a 401(k) loan to purchase a house. When is the interest deductible? The participant, a key employee, secures the loan with the primary residence purchased with the loan. Home mortgage interest is always deductible. The participant, a rank-and-file employee, secures the loan with both the primary residence purchased with the loan and elective deferrals. The participant, a rank-and-file employee, secures the loan only with the primary residence purchased with the loan.