How To Use Equity To Buy An Investment Property

Using the equity in your home is one of the most effective ways to buy an investment property without saving for years for a cash deposit. By tapping into equity, you can accelerate the growth of your property portfolio.

What Is Equity and How Does It Work?

Equity is the difference between your property’s current market value and the remaining balance on your home loan.

It represents the portion of your property that you own outright, free from mortgage debt. As property values rise or you pay down your principal, your equity increases.

For example, if your property is currently valued at $600,000 and you still owe $400,000 on your mortgage, your total home equity is $200,000.

Why Is Equity Important for Investors?

Equity acts as a powerful financial reserve. A portion of every principal-and-interest repayment is directly added to this reserve. However, leaving it untouched means missing out on potential compounding wealth.

Here is why leveraging equity matters:

• Accelerated Wealth Building: Using equity as a deposit allows you to enter the investment market sooner. As your new investment properties appreciate, your overall net worth grows exponentially.
• No Cash Savings Required: By tapping into your equity, you avoid the lengthy process of saving a massive cash deposit. You can safely fund the purchase using the value you have already built.
• Lower Interest Rates: Equity-backed loans are secured by residential real estate. Because they represent a lower risk to lenders, these loans attract lower interest rates than unsecured personal loans.
• Tax Benefits: The interest paid on the loan portion used to buy an income-producing investment property is typically tax-deductible, improving your overall cash flow.

What Is Usable Equity?

Usable equity is the portion of your total home equity that a lender allows you to borrow against.

It is not your total equity.

Instead, lenders typically let you borrow up to 80% of your property’s value, minus your current mortgage balance, to avoid Lenders Mortgage Insurance (LMI).

How to Calculate Your Usable Equity

To find your usable equity, calculate 80% of your property’s current market value, then subtract your remaining mortgage balance.

Usable Equity = (Property Value × Max LVR) − Current Loan Balance

Example Calculation: Imagine your home is valued at $600,000, and you owe $300,000.

In this scenario, you have $180,000 of usable equity that can act as a deposit for your next property.

How Do I Use Equity To Buy An Investment Property?

To use equity to buy an investment property, you must calculate your usable equity, select the right loan product, and apply for a cash-out refinance. Once the funds are released, you use that capital as the deposit and upfront costs for your new property.

Follow these 5 strategic steps:

• Determine your usable equity: Speak with a mortgage broker to get an accurate property valuation and calculate exactly how much equity you can access safely.
• Choose the right loan structure: Decide whether you want to top-up your current loan, refinance to a new lender, or establish a separate Line of Credit.
• Submit your loan application: Provide your broker with recent payslips, identification, and details of your living expenses to prove your loan serviceability.
• Use the released equity as a deposit: Once approved, the lender releases your equity. Use this cash to pay the deposit on your investment property.
• Finalise the purchase: Secure a separate investment loan for the remaining 80% of the property, settle the purchase, and pay your stamp duty and legal fees.

A Guide To Managing Your Home Loan

Now that you’ve started paying off your mortgage, how can you make sure you’re avoiding mortgage stress?

Download the pdf to discover ‘The 3 Golden Rules For Managing Your Home Loan’.

How Do I Estimate Borrowing Power with the Rule of Four?

Once you know your usable equity, you can estimate the maximum purchase price for an investment property using the Rule of Four.

Simply multiply your usable equity by four to determine the maximum property value you can afford with a 20% deposit.

For example, multiplying your $180,000 usable equity by four gives you a maximum purchasing power of $720,000.

Accounting for Upfront Costs

On top of your deposit, it’s important to have additional savings for upfront costs like stamp duty and other charges. These typically amount to around 5% of the property’s value.

When purchasing a $720,000 property, the bank will typically lend 80% ($576,000). The remaining $144,000 is your 20% deposit, funded by your equity.

However, you must also cover the costs of purchasing, such as stamp duty and legal fees. These generally cost around 5% of the property’s value.

• Property Price: $720,000
• 20% Deposit: $144,000 (Covered by equity)
• Upfront Costs (5%): $36,000 (Covered by equity or cash savings)
• Total Funds Required: $180,000

Expert Tip: Always consult a mortgage broker to confirm your exact borrowing capacity and serviceability before signing a contract.

How Much Can I Borrow For An Investment Property?

Most lenders allow you to borrow up to 80% of an investment property’s value without paying LMI. However, highly qualified investors with strong incomes and excellent credit histories can borrow up to 95% of the property value, provided they pay the required LMI premium.

Lenders determine your exact limit by assessing your:

• Current income and living expenses.
• Existing debts (credit cards, personal loans).
• Credit history and repayment behaviour.
• Potential rental yield of the proposed investment property.

How To Maximise Borrowing Power When Using Equity To Buy Investment Property

Here’s how our brokers can help you maximise your borrowing capacity when using equity to buy an investment property:

• Marketing timing is crucial. Property prices and lending standards are constantly changing. Waiting too long can lead to being left behind as land and building costs rise.
• Our brokers use a multi-lender strategy to maximise your borrowing capacity. For example, we might recommend keeping your primary residence with a low-rate lender while securing a new investment loan with a different lender that has more favourable rental income calculations.
• Staying within an 80% Loan-to-Value Ratio (LVR) is generally recommended to avoid paying Lenders Mortgage Insurance (LMI).
• It is important to structure loans correctly to maximise tax deductibility and avoid cross-collateralisation, which can link your properties and limit future flexibility.

Want to maximise your borrowing capacity for your next investment purchase? Our experts are here to help. Call us on 1300 889 743 or complete a free online assessment.

What Are the Best Ways to Build Equity Quickly?

You can build equity rapidly by making extra mortgage repayments, increasing your property’s market value through smart renovations, or switching to a shorter loan term. Accelerating equity growth gives you faster access to investment capital.

Consider these proven strategies:

• Make extra repayments: Paying even $100 extra per month reduces your principal faster and slashes the total interest paid.
• Switch to fortnightly payments: Paying half your monthly amount every two weeks results in 26 payments (the equivalent of 13 monthly payments) per year.
• Renovate to add value: Strategic upgrades like modernising a kitchen, adding a bathroom, or painting can boost your property’s market value.
• Use lump-sum deposits: Channel your tax refunds, work bonuses, or inheritance directly into your loan principal.
• Avoid interest-only loans on your home: Always pay Principal and Interest (P&I) on your owner-occupied home to actively build equity.

What Are the Risks of Using Equity for Property Investment?

Borrowing against your home increases your total debt and your monthly financial commitments. If the property market drops, you risk falling into negative equity. Furthermore, failing to meet repayment obligations could result in losing both your investment property and your home.

Our brokers discussed the following risks and considerations to understand when using equity to buy an investment property:

• Financial Commitment: Using equity increases your total debt. You must be able to service both your original home loan and the new investment debt, even if interest rates rise or the property is vacant.
• Security Risks: If the equity is not used wisely, you could risk losing both the investment property and your primary home.
• Ongoing Costs: Owning an investment property involves ongoing taxes, such as council rates, and unplanned maintenance costs that can drain your cash flow.
• Regulatory Changes: Upcoming rules, such as APRA’s Debt-to-Income (DTI) limits, may restrict how much debt you can take on relative to your income, making it harder to use equity in the future.

To protect yourself, practice strict risk management:

• Maintain a financial buffer: Never drain 100% of your usable equity. Keep cash reserves for unexpected maintenance, interest rate hikes, or rental vacancies.
• Avoid cross-collateralisation: Where possible, keep your family home and investment loans separate. This stops the bank from controlling both properties if things go wrong.
• Buy investment-grade properties: Rely on data, not emotion. Invest in high-growth areas with strong rental demand.
• Plan for cash flow shortages: Ensure your income can cover the mortgage even if the property sits vacant for a month.