When to Use Equity or Deposits for a Townhouse

Most townhouse buyers have a choice between using cash savings or releasing equity from property they already own.

The decision affects your loan structure, the lenders available to you, and whether you can access schemes like the Australian Government 5% Deposit Scheme. It also determines how much you need in genuine savings and what your loan to value ratio will be.

When Cash Savings Work for Townhouse Purchases

A deposit sourced from genuine savings gives you access to the widest range of lenders and home loan products. Lenders treat genuine savings as funds held in your account for at least three consecutive months, and most will accept a mix of savings, term deposits, and shares. If you're buying an owner occupied property and your deposit reaches 20% of the purchase price, you avoid lenders mortgage insurance entirely. At a 15% deposit, some lenders will still offer competitive variable rate and fixed rate options, though LMI applies.

Consider a buyer purchasing a townhouse within the property price cap for the Australian Government 5% Deposit Scheme. With a 5% deposit and Housing Australia's guarantee, the buyer reaches a combined 20% without paying LMI. The scheme applies to both new and established townhouses, provided the purchase price and lender's valuation sit at or below the applicable cap for your location. You can structure the loan as variable, fixed, or split, depending on what the participating lender offers. This approach works if you're a first home buyer with limited savings but steady income, and you're comfortable with a higher loan amount from the outset.

Using Equity from Your Existing Home

If you own property with available equity, you can use that equity as your deposit without needing to sell. Lenders calculate usable equity as 80% of your property's current value, minus what you still owe on it. The released equity becomes your deposit for the townhouse, and the lender secures both properties under a single loan or splits the facilities across two securities.

In a scenario where a buyer owns a home valued at $850,000 with $300,000 remaining on the mortgage, usable equity sits at $380,000. If the buyer is purchasing a townhouse for the purpose of investment, they might release $180,000 as a deposit, keeping some equity in reserve. The loan structure would typically separate the owner occupied portion on the existing home and the investment portion on the townhouse, allowing the buyer to claim interest deductions only on the investment loan. Lenders will assess your borrowing capacity across both properties, factoring in the rental income from the townhouse if you're using an investment loan structure. Serviceability becomes the primary constraint, not the deposit itself.

How Split Rate Structures Apply to Townhouse Loans

A split loan divides your total borrowing between a fixed rate portion and a variable rate portion. The fixed portion locks in your repayments for a set term, usually between one and five years, while the variable portion moves with rate changes and typically allows access to an offset account. This structure suits buyers who want some repayment certainty without giving up all flexibility.

The main benefit is balancing risk. If variable rates rise, your fixed portion remains unchanged. If rates fall, your variable portion benefits immediately, and you're not locked into a higher rate across the entire loan. Most lenders let you choose the split ratio, such as 50/50 or 70/30, depending on your preference. You can also link an offset account to the variable portion, so any funds sitting in that account reduce the interest charged on that part of the loan. If you're planning to make extra repayments or hold surplus cash for upcoming costs, the offset gives you access to those funds while still reducing your interest.

For buyers using equity to fund a townhouse deposit, a split loan structure works particularly well when part of the borrowing is for owner occupied purposes and part is for investment. You can fix the owner occupied portion to manage household repayments and leave the investment portion variable to maximise deductions and flexibility.

First Home Buyers and Help to Buy for Townhouses

Help to Buy allows eligible first home buyers to purchase with a minimum 2% deposit, with the Australian Government contributing up to 30% of the purchase price for an established home or up to 40% for a new home. The Government holds an equivalent equity share and does not charge rent or interest on that share. Townhouses are eligible under the scheme, provided the purchase price sits within the applicable cap for your location.

Income limits apply. From 1 July 2026, individual applicants are capped at $103,000 and joint applicants or single parents at $165,000, based on your most recent ATO Notice of Assessment. You apply through a participating lender, not directly through Housing Australia. The scheme cannot be combined with the Australian Government 5% Deposit Scheme, but you can use state and territory stamp duty concessions and grants alongside it, depending on your location and the property type.

If you're purchasing a new townhouse in Queensland, you may be eligible for the $15,000 first home owner grant, full stamp duty relief on the residential land component, and Help to Buy, provided your income and purchase price sit within the relevant caps. The combined effect significantly reduces the upfront cost. If you're purchasing an established townhouse in New South Wales under the scheme, you would access stamp duty relief through the First Home Buyers Assistance Scheme but no grant, as the NSW grant applies only to new builds.

How Lenders Assess Borrowing Capacity for Townhouse Purchases

Lenders assess your capacity to service a home loan by applying a buffer of at least 3.0 percentage points above the loan product rate. This means if the variable interest rate on your loan is 6.0%, the lender tests whether you can afford repayments at 9.0%. The buffer applies to all new borrowers, whether you're using cash savings or equity, and whether the loan is owner occupied or for investment purposes.

If you're releasing equity and purchasing an investment townhouse, the lender will include rental income in the serviceability assessment, but most lenders only count 80% of the expected rent to account for vacancy and management costs. If you're purchasing in an area where rental yield is strong, that income can meaningfully improve your borrowing capacity. If the townhouse is owner occupied and you're retaining your existing home as an investment, the lender will assess the rental income from your current property and the new loan repayments on the townhouse together.

From 1 February 2026, debt-to-income lending limits apply to all ADIs. Each lender can provide up to 20% of new owner-occupier loans and up to 20% of new investor loans to borrowers with a total DTI ratio of six times or greater. If your total debt sits above six times your gross income, you may still be approved, but your application will form part of the lender's limited allocation. Non-ADI lenders are not subject to this limit, so if serviceability is tight, exploring options outside the major banks may give you more flexibility.

Offset Accounts and Principal-and-Interest Repayments

An offset account is a transaction account linked to your home loan. The balance in the offset is deducted from your loan balance before interest is calculated each day, reducing the interest you pay without locking funds into the loan itself. Most lenders offer 100% offset on variable rate loans and sometimes on the variable portion of a split loan, but offset is rarely available on fixed rate loans.

If you're using equity to fund a townhouse deposit and holding an offset account against the variable portion of your loan, any surplus income or savings sitting in that account reduces your interest charges immediately. This is particularly useful if you receive irregular income, plan to make lump sum repayments, or want to retain liquidity for other purposes. For investment loans, the offset allows you to reduce interest costs without reducing the loan balance, which keeps your deductible interest higher.

Principal-and-interest repayments are the standard structure for owner occupied loans. Each repayment includes both interest on the outstanding balance and a portion that reduces the loan principal. Over time, the interest portion decreases and the principal portion increases. This structure builds equity in the property and ensures the loan is repaid in full by the end of the term. For investment loans, you have the option of interest-only repayments for a set period, typically up to five years, after which the loan reverts to principal-and-interest unless you apply to extend the interest-only term.

How State Stamp Duty Concessions Apply to Townhouse Buyers

Stamp duty treatment varies by state and depends on whether the townhouse is new or established, your status as a first home buyer, and the purchase price. In New South Wales, first home buyers receive a full transfer duty exemption on properties valued up to $800,000, with a sliding concession on properties between $800,001 and $1,000,000. The concession applies to both new and established townhouses. In Victoria, the full exemption applies to properties up to $600,000, with a concession up to $750,000.

Queensland offers full stamp duty relief on new homes with no price cap for first home buyers, but stamp duty on established homes is calculated at the standard home concession rate with an additional first home concession deducted. The first home concession is capped at $17,350 for properties valued up to $709,999 and phases out entirely at $800,000. South Australia offers stamp duty relief on new homes and vacant land only, with no relief available on established homes. Western Australia applies a single statewide threshold, with no duty on homes valued up to $600,000 and a concessional rate on homes between $600,001 and $800,000 for first home buyers.

If you're not a first home buyer, standard rates apply in all states unless an off-the-plan concession is available. Western Australia offers an off-the-plan duty concession on new dwellings purchased in strata, survey-strata, or community titles arrangements, with a 100% concession capped at $50,000 for pre-construction contracts on dwellings valued up to $800,000. The ACT offers full exemption on off-the-plan unit purchases for owner-occupiers from 1 July 2026, with no property value threshold.

Structuring Loans Across Multiple Properties

If you own one property and are purchasing a townhouse, your loan structure depends on whether each property is owner occupied or used for investment. Lenders allow you to split facilities so that the portion secured against your owner occupied home remains on an owner occupied rate, and the portion secured against the investment townhouse is charged at the investment rate. This separation is necessary to maintain the tax deductibility of interest on the investment portion.

Most lenders will allow you to secure both properties under a single mortgage with separate loan accounts, or split the securities entirely with two mortgages. The choice affects portability, offset arrangements, and refinancing flexibility. If you plan to sell your existing home in the future and move into the townhouse, structuring the loans as separate securities can make that transition easier, as you can discharge one mortgage without restructuring the entire facility. If you're releasing equity to purchase the townhouse and your existing home remains owner occupied, lenders will assess the combined loan-to-value ratio across both securities, and LMI may apply if the combined LVR exceeds 80%.

When Pre-Approval Matters for Townhouse Buyers

Pre-approval gives you a conditional commitment from a lender before you make an offer. The lender assesses your income, liabilities, credit history, and the deposit or equity you're using, and confirms the loan amount you're eligible to borrow. Pre-approval is valid for a set period, typically three to six months, and is subject to a satisfactory valuation of the property you're purchasing and no material change in your financial circumstances.

Pre-approval is useful if you're purchasing in a market where properties are selling quickly, or if you're bidding at auction. It confirms your borrowing capacity and shows sellers that you're a credible buyer. If you're using equity from an existing property, pre-approval also confirms that the lender is comfortable with the security and the serviceability across both properties. Some lenders will provide pre-approval subject to sighting the contract of sale and valuation, while others require a specific property address before proceeding. If you're accessing the Australian Government 5% Deposit Scheme or Help to Buy, pre-approval through a participating lender confirms your eligibility and the applicable property price cap for your location.

Call one of our team or book an appointment at a time that works for you. We'll walk through your deposit options, your equity position if you own property already, and the loan structure that fits your circumstances and the townhouse you're purchasing.

Frequently Asked Questions