Skip to content
HomeHome LoansPropertyCalculatorsTax & InvestingMigrationAbout中文

How to Use Equity in Your Current Home to Buy an Investment Property in Australia

How to Use Equity in Your Current Home to Buy an Investment Property in Australia

Buying an investment property is a popular wealth-building strategy in Australia, but saving for a deposit can be a significant hurdle. One way to overcome this is by using the equity in your current home. This guide explains how to leverage home equity for property investment, including the calculations, lender requirements, and risks involved for Australian homeowners.

What Is Home Equity and How Does It Work?

Home equity is the difference between the current market value of your property and the outstanding balance on your mortgage. For example, if your home is worth $800,000 and you owe $400,000, your equity is $400,000. This equity can be used as security for a loan to purchase an investment property, often without needing a cash deposit.

Lenders typically allow you to borrow up to 80% of your home’s value, minus any existing mortgage. This is known as your “usable equity.” Using the example above, 80% of $800,000 is $640,000. Subtract the $400,000 mortgage, and you have $240,000 in usable equity. This amount can be used as a deposit for an investment property, potentially covering the full 20% deposit required to avoid Lenders Mortgage Insurance (LMI).

How to Calculate Your Usable Equity

Calculating your usable equity involves a few simple steps:

  1. Determine your home’s current market value. You can get a professional appraisal or use recent comparable sales in your area. For accuracy, lenders will require a formal valuation.
  2. Calculate 80% of that value. This is the maximum amount most lenders will allow you to borrow against your home.
  3. Subtract your outstanding mortgage balance. The result is your usable equity.

Here’s an example:

StepCalculationAmount
Home value$900,000$900,000
80% of value0.80 × $900,000$720,000
Less mortgage$720,000 - $350,000$370,000
Usable equity$370,000

This $370,000 can be used as a deposit for an investment property. If you’re buying a property worth $600,000, a 20% deposit would be $120,000, leaving you with additional equity for costs or further investments.

Lender Requirements for Using Equity

Australian lenders have specific criteria when you apply to use equity for an investment property. Here are the key requirements:

  • Loan-to-Value Ratio (LVR): Most lenders cap the LVR at 80% for equity release, meaning you can’t borrow more than 80% of your home’s value. Some lenders may go up to 90%, but this usually triggers LMI, adding to your costs.
  • Serviceability Assessment: Lenders will assess your ability to repay the new loan based on your income, expenses, and existing debts. They’ll also factor in potential rental income from the investment property, typically at around 75-80% of the expected rent.
  • Credit History: A good credit score and clean repayment history are essential. Any defaults or late payments can reduce your borrowing power.
  • Property Type and Location: Lenders may have restrictions on certain property types (e.g., small apartments, rural properties) or locations they consider high-risk.
  • Valuation: A professional valuation is required to confirm your home’s market value. The lender will use this to calculate your usable equity.

It’s important to note that lenders treat equity release as a new loan application, so you’ll need to provide full documentation, including payslips, tax returns, and bank statements.

Structuring Your Loans: Cross-Collateralisation vs. Standalone Loans

When using equity to buy an investment property, you have two main loan structures:

Cross-Collateralisation

This involves linking your home and the investment property as security for both loans. For example, your home equity secures the deposit, and both properties secure the investment loan. While this can simplify the process, it reduces flexibility. If you want to sell one property, the lender must agree to release it, which can be complicated.

Standalone Loans

Here, you take out a separate loan against your home equity (often called an equity loan or line of credit) and use it as the deposit for the investment property. The investment property then has its own loan, secured only by that property. This structure offers more flexibility and can be more tax-effective, as interest on the investment loan is generally tax-deductible.

Most financial advisors recommend standalone loans to avoid cross-collateralisation risks. According to the Australian Securities and Investments Commission (ASIC), borrowers should carefully consider loan structures to ensure they align with their financial goals. For more information, visit ASIC’s MoneySmart.

The Process: Step-by-Step Guide

  1. Assess Your Equity: Calculate your usable equity using the method above. Consider getting a professional valuation to avoid surprises.
  2. Check Your Borrowing Capacity: Use an online calculator or consult a mortgage broker to estimate how much you can borrow based on your income and expenses.
  3. Choose a Loan Structure: Decide between cross-collateralisation and standalone loans. Seek advice from a financial advisor or tax professional.
  4. Get Pre-Approval: Apply for pre-approval with a lender. This gives you a clear budget and shows sellers you’re a serious buyer.
  5. Find an Investment Property: Research suburbs with strong growth potential and rental yields. Consider factors like infrastructure, employment hubs, and vacancy rates.
  6. Formal Loan Application: Once you’ve found a property, submit a full application with all required documents.
  7. Valuation and Approval: The lender will value both your home and the investment property. If approved, you’ll receive a loan offer.
  8. Settlement: Complete the purchase and manage your new investment property.

Risks of Using Home Equity for Investment

While leveraging equity can accelerate wealth building, it comes with significant risks:

  • Over-Leveraging: Borrowing too much can strain your finances, especially if interest rates rise or rental income falls. The Reserve Bank of Australia (RBA) has warned about high household debt levels. See the RBA’s Financial Stability Review for insights.
  • Market Downturns: If property values decline, you could end up with negative equity, owing more than your properties are worth.
  • Cash Flow Shortfalls: Investment properties come with ongoing costs like maintenance, rates, and vacancies. If rental income doesn’t cover expenses, you’ll need to fund the shortfall from your own pocket.
  • Tax Implications: While interest on investment loans is tax-deductible, the equity loan used for the deposit may not be if the funds are mixed with personal use. The Australian Taxation Office (ATO) provides guidance on rental property deductions. Visit ATO’s rental property page for details.
  • Losing Your Home: If you default on the investment loan and your properties are cross-collateralised, the lender could force the sale of your home to recover the debt.

Tips for Minimising Risks

  • Maintain a Buffer: Keep savings equivalent to at least 3-6 months of loan repayments to cover unexpected costs or interest rate hikes.
  • Fix Interest Rates: Consider fixing a portion of your loan to protect against rate rises, but be aware of break costs if you need to exit early.
  • Diversify: Don’t put all your equity into one property. Spreading investments across different locations or asset classes can reduce risk.
  • Get Professional Advice: Consult a mortgage broker, financial planner, and accountant to ensure your strategy is sound and tax-effective.
  • Review Regularly: Monitor your portfolio’s performance and adjust your strategy as market conditions change.

Tax Considerations

One of the benefits of using equity for investment is the potential tax deductions. Interest on the loan used to buy the investment property is generally tax-deductible. However, the ATO has strict rules about what you can claim:

  • The loan must be directly related to producing rental income.
  • If you redraw equity for personal use, that portion of interest is not deductible.
  • You can claim depreciation on the building and fixtures, which can significantly boost your after-tax return.

To maximise deductions, keep clear records and consider a split loan structure to separate personal and investment debt. The ATO’s website offers comprehensive guidance: ATO Rental Properties Guide.

Case Study: Using Equity to Buy an Investment Property

Let’s look at a hypothetical example:

  • Home Value: $1,000,000
  • Mortgage: $400,000
  • Usable Equity: (80% × $1,000,000) – $400,000 = $400,000
  • Investment Property Price: $700,000
  • Deposit (20%): $140,000 from equity
  • Investment Loan: $560,000 (80% LVR)

The investor uses $140,000 of equity as a deposit, leaving $260,000 in usable equity for further investments or a buffer. The rental income covers most of the loan repayments, and the investor claims tax deductions on interest and depreciation.

Current Market Trends (2023-2026)

As of 2025, the Australian property market has seen moderate growth, with regional areas outperforming capital cities in some cases. According to CoreLogic data, national home values increased by 8.5% in 2024, driven by strong demand and limited supply. Interest rates have stabilised after the RBA’s tightening cycle, with the cash rate at 4.35% as of early 2025. This has improved borrowing conditions, but affordability remains a challenge.

For investors, rental yields have improved in many areas due to rising rents and a tight vacancy rate. The national vacancy rate is around 1.5%, according to SQM Research, supporting rental income. However, investors should be cautious of potential regulatory changes, such as reforms to negative gearing or capital gains tax, which could impact returns.

FAQ

Can I use equity if I have a low income?

Lenders assess your serviceability based on your total income, including rental income. If your income is low, you may struggle to meet the repayment requirements, even with equity. Consider reducing your debt, increasing your income, or buying a lower-priced property.

Is it better to use equity or save a cash deposit?

Using equity can speed up your investment timeline, but it increases your overall debt and risk. Saving a cash deposit may take longer but reduces your leverage. The right choice depends on your financial situation, risk tolerance, and market conditions.

What happens if my property value drops?

If your home’s value falls, your usable equity decreases. In a worst-case scenario, you could have negative equity. This limits your borrowing power and may force you to sell assets if you can’t meet loan repayments. Maintaining a buffer and avoiding maximum borrowing can mitigate this risk.

How much equity do I need to buy an investment property?

Ideally, you need enough equity to cover a 20% deposit plus purchase costs (e.g., stamp duty, legal fees). For a $600,000 property, you’d need around $150,000-$180,000 in equity, depending on your state’s stamp duty rates.

References

Equity investment property