Using Equity to Buy Investment Property: The Pros and Cons

Can You Use Equity to Buy an Investment Property?

You can use equity in your existing property to fund the deposit and purchase costs of an investment property without needing to save additional cash. Lenders will assess your borrowing capacity based on your current income, all existing debts, and the combined loan-to-value ratio across both properties.

Equity is calculated as the difference between what your property is worth and what you still owe on it. If your home is worth $750,000 and you owe $400,000, you have $350,000 in equity. Most lenders will allow you to access up to 80 per cent of the property value, meaning you could borrow up to $600,000 in total across both your existing loan and the new investment loan, leaving $150,000 available to draw down.

That available equity can cover the deposit on the investment property, plus associated costs such as stamp duty, legal fees, and building and pest inspections. In our experience, many investors are surprised to learn they already have enough equity to move forward, particularly if they have owned their home for several years or paid down the principal.

How Lenders Assess Your Application

Lenders assess investment loan applications using a higher serviceability buffer and stricter income calculations than they apply to owner-occupier loans. Every lender must calculate your ability to service the new loan at an interest rate that is at least 3.0 percentage points above the actual product rate, and they apply a rental income discount, typically around 80 per cent of the expected rent, to account for vacancy periods and maintenance.

Consider a borrower earning $120,000 a year who wants to use equity in their home to buy an investment property. The lender will assess the rental income from the new property at 80 per cent of the advertised weekly rent, then test whether the borrower can service both the existing home loan and the new investment loan at a rate 3.0 percentage points higher than the current variable or fixed rate. If the borrower has other commitments such as a car loan or personal loan, those repayments also reduce borrowing capacity.

Since February this year, lenders have also been required to limit the proportion of new loans they write to borrowers with a total debt-to-income ratio of six times or greater. This means if your combined borrowing across your home and the new investment property would exceed six times your gross annual income, some lenders may decline the application or require you to reduce the loan amount, even if you can demonstrate serviceability.

Structuring the Investment Loan

Most investors structure the investment loan separately from their owner-occupier home loan to keep the interest deductions clear for tax purposes. Setting up a standalone investment loan secured against both properties means all interest on that loan is deductible, while interest on your home loan remains non-deductible.

You can choose between a variable rate, a fixed rate, or a split loan that combines both. Variable rates allow you to make extra repayments and access redraw or offset facilities, which can be useful if you plan to pay down the loan or build a cash buffer. Fixed rates lock in your repayment for a set period, but typically come with restrictions on extra repayments and break costs if you need to exit the loan early.

Interest-only repayments are a common choice for investment loans because they reduce the monthly repayment amount and allow you to claim the maximum deduction. Principal and interest repayments build equity in the investment property over time, but they also reduce the amount you can claim each year. The decision depends on your cash flow, your tax position, and whether you plan to hold the property long-term or sell within a few years.

What Happens When You Go Above 80 Per Cent LVR

If the combined lending across your home and the new investment property exceeds 80 per cent of the total property values, you will need to pay Lenders Mortgage Insurance. LMI is a one-off premium calculated on the portion of the loan that exceeds 80 per cent LVR, and it is capitalised into the loan amount or paid upfront at settlement.

As an example, if you own a property worth $800,000 with a $450,000 loan and you want to buy an investment property for $600,000, the total lending would be $1,050,000 against total security of $1,400,000, giving an LVR of 75 per cent. You would not need to pay LMI. If instead you owed $500,000 on your home and wanted to borrow the full $600,000 for the investment, the total lending of $1,100,000 would represent 78.5 per cent LVR, still under the threshold. But if you wanted to borrow an additional $50,000 to cover stamp duty and settlement costs, bringing total lending to $1,150,000, the LVR would rise to 82 per cent and LMI would apply to the portion above 80 per cent.

LMI premiums vary between insurers and depend on the loan amount, LVR, and whether the loan is for investment or owner-occupier purposes. Investment loans generally attract higher premiums than owner-occupier loans at the same LVR. The premium is not tax-deductible in the year it is paid, but it can be claimed as a deduction over five years or the life of the loan, whichever is shorter.

Tax Treatment and Deductibility

Interest on borrowings used to acquire or hold a rental property is deductible against your assessable income, provided the property is rented or genuinely available for rent. Other holding costs including council rates, insurance, property management fees, and repairs are also deductible during the rental period.

For properties you already owned at 7:30pm AEST on 12 May last year, rental losses can still be deducted against your salary, business income, or other assessable income. From the income year starting 1 July next year, losses on established residential investment properties acquired after that date can only be offset against income from other residential properties, including capital gains. Losses can be carried forward to future years. Eligible new builds remain exempt and continue to allow full deductibility of losses against all income.

If you use equity in your home to build a secondary dwelling such as a granny flat on the same title and rent it out, the portion of the loan used for construction is treated as an investment loan for tax purposes, and the interest on that portion is deductible. Keeping the loans separate or using a split loan structure makes it straightforward to identify which interest relates to the investment and which relates to your home.

What Rental Income Do Lenders Recognise

Lenders apply a vacancy rate or discount factor to the rental income you declare on your application. The standard discount is 20 per cent, meaning if the property is advertised at $600 per week, the lender will assess your income at $480 per week. This accounts for periods when the property is vacant, routine maintenance, and other costs that reduce the net income you actually receive.

Some lenders will accept granny flat rental income if the dwelling is compliant, separately metered, and has its own access and facilities. Others will not recognise the income at all, particularly if the granny flat is not yet built or does not have an independent certificate of occupancy. If you are relying on rental income to support your borrowing capacity, confirm with your broker which lenders will accept the income type before you commit to a purchase.

Income from NDIS participants, boarders, or short-term rental platforms is treated differently by different lenders. Some will accept it with evidence of a signed lease or service agreement, while others exclude it entirely from their serviceability calculation. The assessment depends on whether the income is considered stable and verifiable.

Pros and Cons of Using Equity

Using equity allows you to enter the property market without needing to save a separate cash deposit, and it means you can act quickly when an opportunity arises. You retain full ownership of both properties, and any capital growth on the investment property accrues to you. The interest on the investment loan is deductible, which reduces the after-tax cost of holding the property.

The downside is that you are increasing your overall debt and your exposure to interest rate movements. If rates rise or rental income falls, your cash flow can come under pressure. You also have less equity available in your home, which reduces your flexibility if you need to access funds for other purposes. If property values fall, you could find yourself in a position where the combined lending exceeds 80 per cent of the total property values, making it difficult to refinance or sell without paying LMI or covering a shortfall.

Another consideration is that your home is now cross-secured with the investment property. If you default on the investment loan, the lender has a claim over both properties. Some borrowers prefer to keep the securities separate and accept a higher LVR on the investment property to avoid cross-securitisation, but this typically means paying LMI and may limit the number of lenders willing to approve the loan.

When to Refinance or Restructure

If you already own an investment property and want to access equity to buy another, refinancing your investment loan may allow you to increase the loan amount and release equity for the next purchase. Lenders will reassess your borrowing capacity based on your current income and commitments, and they will apply the same serviceability buffer and rental income discount as they would for a new application.

Refinancing can also allow you to move from a principal and interest loan to an interest-only loan, or vice versa, depending on your current tax position and cash flow needs. If you have paid down your investment loan and built up equity, switching to interest-only and redrawing the principal can increase your deductible interest, but you should seek advice from a licensed tax adviser before making that change.

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