Can I Use Equity to Buy an Investment Property?

If you already own a home and you’re thinking about buying an investment property, you might be wondering:

Can I use the equity in my home instead of saving another deposit?

Potentially, yes.

If your property has increased in value or you’ve paid down your home loan, you may have built up equity that could help fund the deposit and purchasing costs for an investment property.

But having equity doesn’t automatically mean you can buy again.

You also need enough usable equity, and you’ll still need to show a lender that you can afford the additional borrowing.

Here’s how it works.

What is equity?

Equity is simply the difference between what your property is worth and how much you still owe on it.

For example, imagine:

Your home is worth $900,000
You owe $500,000 on your home loan

You have approximately $400,000 in equity.

But that doesn’t necessarily mean you can access the entire $400,000 to buy another property.

That’s where usable equity comes in.

What is usable equity?

Lenders will generally only allow you to borrow up to a certain percentage of your property’s value before additional requirements or costs may apply.

A common starting point when looking at usable equity is 80% of the property’s value.

An example. is:

Property value: $900,000

80% of the value: $720,000

Current home loan: $500,000

Potential usable equity: $220,000

So while the homeowner has $400,000 in total equity, approximately $220,000 may potentially be available without increasing the lending above 80% of the property’s value.

This is only an example. How much equity you can actually access will depend on your lender, property valuation and financial circumstances.

Fun Fact: The reason you want to keep at least 20% in the current property is so that you don't pay lenders mortgage insurance (LMI).

Can I use equity instead of saving another deposit?

Potentially.

One of the main reasons property owners access equity is to help fund another property purchase.

Instead of saving the entire deposit in cash, you may be able to borrow against the equity in your existing property and use those funds towards things such as:

The investment property deposit
Stamp duty
Legal and conveyancing costs
Other eligible purchasing costs

This can allow some homeowners to buy another property sooner than if they had to save a completely new deposit.

But here's the thing...

The equity itself isn’t free money.

When you access equity, you’re borrowing additional money against your existing property.

That means your overall debt increases.

How does using equity to buy an investment property work?

Usually, the first step is determining what your existing property is currently worth.

Your Broker can arrange a valuation with your current lender rather than simply relying on an online property estimate or what a real estate agent thinks the property could sell for.

Once the lender has established the value, your Broker can work out how much usable equity may be available to you.

If you have enough equity and meet the lender’s requirements, additional funds may then be released to help with the new purchase.

The remaining amount required to buy the investment property would generally be funded by a separate investment loan.

How these loans are structured matters, so it’s worth understanding the setup before simply increasing your existing home loan.

Having equity doesn’t mean you can automatically borrow more!

This is one of the biggest misunderstandings I see around equity.

You might have $200,000 of usable equity sitting in your home.

And sure... that's great.

But the lender still needs to determine whether you can afford to borrow the additional money.

They’ll look at things such as your:

Income
Existing mortgage
Living expenses
Credit cards
Personal and car loans
HELP debt
Dependants
Expected rental income
Other financial commitments

So there are really two questions you need to answer:

Do I have enough equity?

And:

Do I have enough borrowing capacity?

You need both pieces to work.

Someone can have plenty of equity but not enough income to support another loan.

What if my property has increased in value?

You don’t necessarily need to have made years of extra repayments to build equity.

If your property’s value has increased since you purchased it, you may have more equity than you realise.

For example, perhaps you bought your home for $700,000 several years ago and it’s now valued at $850,000.

That increase in value may have created additional equity.

But the number that matters for lending purposes is generally the valuation accepted by the lender, not an online property estimate.

It's important to also know that different lenders may also arrive at different valuations for the same property.

For example, CBA may value your property at $850,000, but ANZ might only value it at $780,000.

This matters! Because, the lender that values your property at the highest amount, essentially means you have more equity.

Do I need a 20% deposit for the investment property?

Not necessarily.

The amount required will depend on the lender, your financial position and the property you’re buying.

Borrowing more than 80% of a property’s value can sometimes mean paying Lenders Mortgage Insurance, commonly known as LMI.

Moneysmart explains that LMI protects the lender , not the borrower . If the borrower can’t repay the loan after the sale of the property, and sale proceeds don't cover the outstanding debt, LMI is what covers the shortfall.

The Insurance Council Of Australia explains more about LMI here.

Whether using a smaller deposit makes sense will depend on your individual circumstances.

Having enough equity to contribute a larger deposit can potentially reduce the amount you need to borrow against the new investment property, but it still needs to make sense as part of the overall loan structure as it needs to be repaid.

Should you use all the equity available to you?

Just because equity is available doesn’t mean you need to use every dollar of it.

Accessing equity increases your debt, which means higher repayments and potentially more interest over time.

It’s worth thinking about what happens if:

Interest rates increase
Your investment property is vacant
You have unexpected repairs
Your income changes
Your personal expenses increase

Keeping some financial breathing room can be just as important as finding the deposit.

The question shouldn’t only be:

“How much equity can I access?”

It should also be:

“How much makes do I need for what I’m trying to do?”

Find out whether your equity could fund your next property

If you’ve owned your home for a while, you may be closer to buying an investment property than you think.

But before you start property hunting, it’s worth understanding both sides of the equation: how much usable equity you have and how much additional borrowing you can comfortably support.

That can give you a much more realistic idea of your potential purchase budget and whether buying an investment property is possible right now.

If you’re thinking about using equity to buy your first investment property, I can help you work through your finances, understand your borrowing capacity and deposit and compare suitable lending options before you make your next move.

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