Broker Codex

How to use the equity in your home to buy an investment property

By Broker Codex Editorial

Equity is the difference between what your home is worth today and what you still owe on the mortgage. If your home is worth $700,000 and you owe $400,000, you have $300,000 of equity. In practice, lenders allow access to up to 80% of your home's value in total debt (higher with Lenders Mortgage Insurance), which means part of your equity can be used to fund an investment property deposit. The process involves getting your home revalued, taking out an equity release loan, and using those funds toward the investment. Interest on the portion used for investment purposes is generally tax deductible.

Using equity to buy an investment property is one of those things that sounds complicated until someone walks you through it clearly. It isn't a mysterious financial trick. It's recognising that the growth in your home's value can be used as a stepping stone to the next property, without needing to save a deposit from scratch.

Here's how it actually works.

What is equity?

Equity is the difference between what your home is worth today and what you still owe on the mortgage.

Equity = current property value - remaining mortgage balance

If your home was valued at $700,000 today and you owe $400,000 on your mortgage, your equity is $300,000.

Equity grows two ways: as you pay down your mortgage, and as your property increases in value. For most Australian homeowners, property value growth is the bigger driver over time.

What's "usable equity"?

You can't access all your equity. Lenders cap your total borrowings against the home at a specific loan-to-value ratio.

The standard rule: lenders will typically let you go up to 80% of your home's value in total loans without triggering Lenders Mortgage Insurance (LMI). Some will go higher with LMI applying.

The usable equity formula:

Usable equity = (80% of property value) - remaining mortgage balance

Using the same example:

  • Property value: $700,000

  • 80% of property value: $560,000

  • Remaining mortgage: $400,000

  • Usable equity: $160,000

That $160,000 could be used to fund an investment property deposit, renovation costs, or another significant purpose. Above 80%, LMI applies and the maths changes.

How does using equity for investment actually work in practice?

There are two main approaches.

Option 1: Refinance your existing home loan. You refinance into a new, larger loan (up to the 80% LVR limit). The additional funds are set aside for the investment purchase or held in a separate account until needed.

Option 2: Take out a separate equity release loan. Instead of refinancing your original loan, you take out a second loan secured against your home, specifically for the investment purpose. This keeps your original mortgage untouched.

Option 2 is often cleaner for tax purposes because it keeps the investment-purpose debt clearly separate from your home loan debt. That separation matters for how the interest can be claimed.

What about the actual investment property loan?

The equity release funds the deposit on the investment property. You'll also need a separate loan for the balance of the investment property purchase.

Using round numbers:

  • Investment property price: $500,000

  • Deposit required (20%, no LMI): $100,000

  • Investment property loan: $400,000

The $100,000 deposit is funded from your equity release (secured against your home). The $400,000 investment loan is secured against the investment property itself.

You now have three loans (or three loan components):

  1. Original home loan (secured against your home)

  2. Equity release loan (secured against your home)

  3. Investment property loan (secured against the investment property)

Each has its own interest rate and repayment structure.

What about the tax treatment?

This is where loan structure genuinely matters, and where a good accountant pays for themselves.

The general principle: interest on debt used to fund investment purposes is tax deductible against rental income (and often other income, where the property is negatively geared). Interest on debt used for personal purposes isn't.

If your equity release loan is used entirely for the investment, the interest on that loan is generally deductible. If it's used partly for investment and partly for personal purposes (say, a car or a holiday), only the investment portion is deductible, and the apportionment creates ongoing complexity.

This is why keeping the investment-purpose debt clearly separate matters. Mixed-purpose loans create tax headaches that are expensive to untangle later.

Talk to your accountant before structuring the loans, not after. Getting the setup right upfront saves significant tax across the life of the investment.

How do I know how much equity I actually have?

Two steps:

  1. Get a professional property valuation. Real estate agent estimates are a rough guide only; lenders don't rely on them. Your lender will typically order a formal valuation (from a valuer on their approved panel) as part of the equity release process.

  2. Check your current mortgage balance. Your latest bank statement shows the exact figure.

Once you have both numbers, you can calculate your usable equity using the 80% rule.

What are the risks?

Being direct: using equity to invest increases your total debt and your total exposure to the property market. This is worth understanding before you go ahead.

Key risks:

  • If property values fall, you may have negative equity in one or both properties

  • You're paying repayments on more total debt, which means a drop in income affects you more

  • Interest rate rises affect both loans, compounding the impact

  • If the investment underperforms (low rent, high vacancy, major repairs), the cash flow pressure falls on you

  • Cross-collateralisation risk. If both properties secure both loans, problems with one property affect the other. Ask your broker how the loans will be structured

None of these are reasons not to use equity. They're reasons to plan carefully, keep a cash buffer, and make sure the investment property choice is sound.

Frequently asked questions

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

Depends on the property price. For a $500,000 investment property with a 20% deposit and no LMI, you'd need around $100,000 for the deposit plus another $25,000 for buying costs. So around $125,000 of usable equity as a rough starting point.

Can I use equity if I still owe a lot on my mortgage?

Yes, if the property has grown in value enough to create equity above your current balance. Many homeowners who bought several years ago have significantly more equity than they realise because of growth.

Will I need LMI to use equity?

Only if your total home loan (including the equity release) pushes above 80% of the home's value. Below 80%, no LMI. Above, LMI applies on the equity release portion.

Should I use equity or save a cash deposit?

Both work. Equity is faster (accessible in weeks rather than the years it takes to save $100,000). Cash deposits keep debt lower. Many investors use a combination. A broker can model both approaches for your situation