How to Use Equity to Buy an Investment Property in Australia

🧮 Total equity vs usable equity🔗

🎯 The essential: Total equity is what you own on paper. Usable equity is what a lender will actually let you borrow against, and the two numbers are often very different.

Equity is the difference between what your property is worth and what you still owe: Total equity = Property value − Mortgage balance.

But lenders won't let you borrow against 100% of your home's value. Most cap lending at 80% of the property's value before requiring Lenders Mortgage Insurance. Your existing mortgage balance eats into that 80%: Usable equity = (80% × Property value) − Mortgage balance. That gap is what most lenders will let you access without triggering LMI on your existing home.

📊 A worked example🔗

Priya's home is worth $850,000, with $480,000 remaining on her mortgage.

Priya wants a $700,000 investment unit. A 20% deposit is $140,000, plus stamp duty (state-dependent, check your state revenue office or our housing affordability guide for context) and conveyancing costs, altogether comfortably within her $200,000 usable equity. She releases the equity, uses it for the deposit and costs, and takes out a separate investment loan for the rest. She ends up with two loans: her original home loan (topped up), and a new investment property loan, each secured by its own property.

🏦 How lenders actually release equity🔗

Loan top-up (refinance): the most common approach. Your existing home loan is increased by the equity release amount, and you use those funds as the deposit and costs.

Line of credit (home equity loan): a separate facility secured against your home, up to the usable equity limit, drawn on as needed. Some investors prefer this for flexibility, though rates can differ from a standard variable investment loan, compare current rates with your lender.

The serviceability catch: the lender doesn't just check whether you can service the top-up, they assess whether you can service both loans combined, the increased home loan and the new investment loan, at the same time. This is where a lot of would-be investors get knocked back, your borrowing capacity is assessed on your full debt position, not just the new piece.

🔗 Cross-collateralisation: why most brokers warn against it🔗

When you release equity and buy an investment property, you'll typically end up with two separate loans. Some lenders will suggest structuring it differently instead: using both properties as security for both loans under one lender. This is cross-collateralisation.

It sounds convenient, one lender, one relationship, less paperwork. Here's why mortgage brokers commonly advise against it:

• You lose control of your own sale. If you sell the investment property, the lender can require proceeds to pay down both loans, not just the investment loan.
• Refinancing becomes harder. Because both properties are tied together, you can't move just one loan to a better-rate lender without refinancing everything at once.
• The lender can revalue both properties simultaneously. If values fall, the lender can reassess your entire security position at once.
• Less negotiating power, when all your debt sits with one lender, you have no realistic threat of leaving.

It isn't universally catastrophic, if you're buying one property, never plan to sell, and won't refinance, the practical risks are lower. But for building a portfolio over time, where you'll want to sell, refinance, or access equity from individual properties, it creates real friction. Keeping loans separate from the start is the common recommendation.

🔍 What lenders actually look at🔗

• Income and existing debts. Both loans need to be serviceable on your current income minus existing commitments. Lenders apply a buffer rate above the actual interest rate to stress-test repayments.
• Rental income, but not all of it. Lenders commonly discount rental income to around 70-80% of gross rent, the remainder assumed to cover vacancies, management fees and maintenance. A unit renting for $550 a week might only count $385-$440 toward your income.
• LVR on both properties, checked that neither exceeds 80% (or that LMI is factored in if it does).
• Your overall debt-to-income ratio, lenders have become more conservative here, a high ratio can mean a knock-back even with strong income.

💰 A note on LMI🔗

If your usable equity doesn't quite stretch to a 20% deposit, you'll be looking at an LVR above 80% on the new loan, which triggers Lenders Mortgage Insurance. LMI protects the lender, not you, it's a one-off premium that can be significant, and it's set by mortgage insurers and varies by lender, LVR and loan size, use a current LMI calculator for an accurate figure. Most investors try to avoid it by ensuring their equity covers a full 20% deposit plus costs, if you're close but not quite there, it's often worth waiting a few months for further equity growth.

Rental income is assessable income at tax time, and interest on the investment loan is generally deductible against it. If deductible expenses exceed rental income, you're negatively geared, that loss can offset your other income. Our negative gearing guide covers whether that makes sense for your situation.

❓ Frequently asked questions🔗