Using your equity to buy an investment property: how it works

Equity is the difference between what your home is worth and what you still owe on your mortgage. If you own a home worth $700,000 with $400,000 owing, you have $300,000 of equity. In practice, lenders let you access up to 80 percent 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 or purchase. The process involves getting your home revalued, refinancing or applying for a new loan against your equity, and using those funds toward the investment. Interest on the portion used for investment purposes is generally tax deductible. Using equity is one of the most common ways Australians move into their first investment property.

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This post is part of the Investing in property as an Australian woman guide. If you want the broader picture on investing, start there.

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 just recognising that the growth in your home's value can be used to fund a next step.

Here's how it actually works.

What is equity, really?

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

The formula is simple:

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 in two ways: as you pay down your mortgage (each principal payment increases equity), and as your property increases in value (rising property values increase equity even if you make no extra repayments).

For most Australian homeowners, the second driver is bigger than the first. Over time, property value growth typically creates far more equity than paying down the mortgage does.

What's "usable equity"?

You can't access all your equity to fund something new. Lenders limit you to a percentage of your home's value in total debt.

The standard rule: lenders will typically let you go up to 80 percent of your home's value in total loans without triggering Lenders Mortgage Insurance (LMI). Some lenders 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: $560,000 - $400,000 = $160,000

That $160,000 could be used to fund an investment property deposit, renovation costs, or another significant purpose. Above 80 percent, LMI kicks in and the calculation changes.

How does using equity for investment actually work?

There are two main ways to access equity for investment purposes:

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

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

The second option is often cleaner for tax purposes because it keeps the investment-purpose debt clearly separate from your home loan debt (important for tax deductibility calculations).

Which option suits you depends on your existing loan structure, your lender, and your accountant's advice on tax treatment.

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 percent, 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.

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 schedule. Some can be interest-only, some principal-and-interest, depending on your strategy and lender.

What about the tax treatment?

This is where the structure really matters, and where good advice pays for itself many times over.

The general principle: interest on debt used to fund investment purposes is tax deductible against the rental income (and other income if the property is negatively geared). Interest on debt used for personal purposes (like your home) is not deductible.

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

This is why keeping the investment-purpose debt clearly separate (rather than mixed with your home loan) matters. Mixed-purpose loans create tax headaches and can reduce the deductions you can legitimately claim.

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. This is the number that determines your usable equity.

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

Once you have both numbers, calculate your equity and usable equity (using the 80 percent rule above). A mortgage broker can walk you through what's realistic for your situation.

What are the risks of using equity for investment?

Being direct: using equity to buy investment property increases your total debt and your total exposure to property market movements. This is worth understanding clearly.

Key risks:

1. If property values fall, you may have negative equity in one or both properties. Not a problem if you can meet the repayments and hold long-term, but stressful if you need to sell in a downturn.

2. You're now paying repayments on more total debt. If your income drops (job loss, illness, business downturn), servicing all the loans becomes harder.

3. Interest rate rises affect both loans. A 1 percent rate rise increases your total monthly repayments more than it would have with just one loan.

4. If the investment property underperforms (low rent, high vacancy, unexpected costs), the cash flow burden falls on you.

5. Cross-collateralisation risk. If your loans are structured with both properties as security (rather than each property securing its own loan), problems with one property can affect the other. Ask your broker specifically about how loans will be secured.

None of these are reasons not to use equity. They're reasons to plan carefully, keep buffer savings, and make sure the investment property genuinely fits your long-term strategy.

When is using equity the right move?

Using equity to buy an investment property tends to make sense when:

• You have significant usable equity (typically $100,000+)
• Your income can comfortably service the total debt across all properties
• You have a savings buffer beyond the equity you're accessing
• The investment property fits a long-term wealth strategy you've thought through
• You have a good accountant to structure the loans properly
• You're comfortable with the risk profile

It tends to be less right when:

• Your income is stretched already
• You have no cash savings beyond the equity
• You're being rushed into it by urgency (from a friend, family member, or property promoter)
• The investment property choice isn't clearly sound
• You haven't talked to an accountant

Frequently asked questions

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

Depends on the investment property price. To buy a $500,000 investment property with a 20 percent deposit (no LMI), you'd need $100,000 in usable equity for the deposit, plus enough additional funds for stamp duty and buying costs (approximately $25,000 for that price range). So around $125,000 to $130,000 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 mortgage balance. This is why property revaluation matters. Many homeowners who bought several years ago have significantly more equity than they realise because their property has grown while their mortgage has been paid down.

Will I need Lenders Mortgage Insurance to use equity?

Only if you push your total home loan (including the equity release) above 80 percent of your home's value. If you stay at or below 80 percent, no LMI applies. Above 80 percent, LMI kicks in on the equity release portion.

Should I use equity or save a cash deposit for the investment?

Both work. Equity is usually faster (accessible in weeks rather than the years it takes to save $100,000 in cash). Cash deposits keep debt levels lower and reduce risk. Many investors use a combination, funding part of the deposit through equity and part through cash savings. A broker can help you model both approaches.

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This article is general information only and does not constitute financial, legal or tax advice. Please speak to a licensed financial adviser, solicitor and your accountant about your specific circumstances.

Rielle Berglund is a mortgage broker and the founder of Matilda Tree Finance. She works with Australian women navigating major financial transitions, including separation, divorce, terminal illness and bereavement. She is also the creator of Runa, a free financial literacy app built for exactly this stage of life.

Book a confidential conversation with Rielle at matildatreefinance.com.au or start with Runa, free, at runaapp.com.au.

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You may also find these helpful

• Investing in property as an Australian woman: a clear starting point
• How borrowing capacity works for investment property in Australia
• Building your first investment property portfolio as a single mum

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Sources and references

This article draws on Rielle Berglund's professional experience as a mortgage broker. The following sources are relevant to topics covered:

• ASIC Moneysmart on home loans: moneysmart.gov.au/home-loans
• APRA macroprudential guidance: apra.gov.au/macroprudential