One of the most common misconceptions about buying an investment property is that you need to save a fresh cash deposit. If you already own a home that has grown in value, you may have usable equity that can cover the full deposit — without touching your savings. Here's how it works.
What Is Home Equity?
Equity is simply the difference between your property's current market value and what you still owe on your mortgage.
Equity Formula
Equity = Current Property Value − Outstanding Loan Balance
Example (total equity): If your home is worth $900,000 and you owe $500,000, you have $400,000 in total equity. Not all of this is available to borrow against — see usable equity below.
However, not all of that equity is available to borrow against. Lenders allow you to borrow up to 80% of your property's value before requiring Lenders Mortgage Insurance (LMI). Your usable equity is the gap between that 80% limit and your current loan balance.
How to Calculate Your Usable Equity
Usable Equity Formula
Usable Equity = (Property Value × 80%) − Outstanding Loan
| Property Value | 80% Limit | Loan Owing | Usable Equity |
|---|---|---|---|
| $800,000 | $640,000 | $450,000 | $190,000 |
| $1,000,000 | $800,000 | $500,000 | $300,000 |
| $1,200,000 | $960,000 | $600,000 | $360,000 |
The Rule of Four
A quick way to estimate what property you can buy is to multiply your usable equity by four. This works because you're using the equity as a 25% deposit on the investment property, keeping the investment loan at 75% LVR — well within standard lender limits and comfortably below the 80% threshold where LMI kicks in.
Rule of Four Example
Usable equity: $200,000
Maximum investment property price: $200,000 × 4 = $800,000
You'd use the $200,000 as a 25% deposit, and borrow the remaining $600,000 (75% LVR) for the investment property.
How to Access Your Equity
There are two main ways to use your equity as a deposit:
Option 1: Refinance and Top Up
You refinance your existing home loan to a higher amount and draw out the equity as cash. You then use that cash as the deposit for your investment property and take out a separate new loan for the rest. This approach is clean and keeps the two loans clearly separate.
Option 2: Equity Release (Loan Top-Up)
Some lenders will add a new loan split to your existing home loan without requiring a full refinance. You access the equity through this split and use it as the investment deposit. Faster than refinancing, but not always available — depends on your current lender and their policies.
Loan Structure: Standalone vs Cross-Collateralisation
This is one of the most important decisions you'll make — and most people don't know it's even a choice.
Standalone Loans (Recommended)
Each property secures its own loan. Your home is security for your home loan. Your investment property is security for the investment loan. The two are completely separate.
Why Standalone Is Better for Most Investors
- Sell either property without affecting the other
- Refinance one loan without disturbing the other
- Switch to a different lender for each property independently
- Full control over your equity — the bank can't revalue both properties together
Cross-Collateralisation (Use With Caution)
Some lenders will use both properties as security for both loans, linking them together. This might seem simpler at the start, but it creates significant problems later:
- If you want to sell one property, the lender must reassess the entire security structure
- Switching lenders becomes complicated — the new lender has to take on both loans
- If one property falls in value, your ability to access equity in the other can be affected
- You give the lender control over assets that should be separate
In almost every case, a well-structured broker will recommend standalone loans. Cross-collateralisation primarily benefits the lender, not the borrower.
Will You Qualify? Serviceability Explained
Having the equity is only half the equation. The lender also needs to be satisfied you can afford both loans.
Under APRA rules, lenders must assess your ability to repay at 3% above the actual loan rate. So if your investment loan is at 6.5%, they'll test your repayments at 9.5%. This is the serviceability buffer — designed to make sure you can still cope if rates rise.
How Rental Income Is Counted
Lenders only count 80% of the expected rental income from your investment property when assessing your serviceability. This reflects vacancy periods and management costs.
Example: Rental income of $3,000/month → lender counts $2,400/month toward your income.
The good news: rental income from the investment property does count toward your income, which helps offset the new loan repayments. But you still need enough salary or other income to meet the buffer test.
Tax Benefits of Using Equity
When you use equity from your home to fund an investment property, the interest on the investment loan is generally tax deductible — because the borrowed funds are being used for investment purposes. This is true whether you refinance your home loan or take out a new standalone loan for the investment. Confirm with your accountant as individual tax circumstances vary.
However, you need to be careful about loan structure. If you mix investment and personal borrowing in the same loan account, you can create a messy situation that complicates your tax deductions. Keeping the loans separate makes the deductibility clear and easy for your accountant.
If your investment property runs at a loss (expenses exceed rental income), that loss can be offset against your other income — including your salary. This is negative gearing, and it's a legitimate tax strategy, though one worth monitoring given the policy debate currently underway.
The Risks — Be Honest With Yourself
Using equity to invest magnifies your exposure. If property values fall, you could end up owing more across both loans than the properties are worth.
Key Risks to Factor In
- Vacancy: If the investment property sits empty, you pay the mortgage without rental income
- Rate rises: Two variable rate loans are twice the exposure to any future RBA increases
- Valuation risk: A lower-than-expected bank valuation on your home means less usable equity than you planned
- Repairs and costs: Investment properties have ongoing costs — budget conservatively
Buffer Rule
Don't use every dollar of your usable equity. Keep a buffer — ideally 3–6 months of total mortgage repayments held in cash or offset — so that a vacancy or unexpected repair doesn't put you under immediate pressure.
Steps to Get Started
- Get a property valuation — an upfront bank valuation tells you exactly how much equity you have. This is different from an online estimate.
- Calculate your usable equity — using the formula above, and subtract a sensible buffer
- Check your serviceability — a broker can run the numbers across multiple lenders to find who will approve your scenario
- Structure the loans correctly — standalone is almost always better; confirm this before signing anything
- Talk to your accountant — especially about how the investment loan interest will be treated, and the CGT implications when you eventually sell
Sources: CommBank — Using equity to buy property; NAB — Using equity to invest; Canstar — Cross-Collateralisation Explained; Money.com.au — Using equity for investment
Written by Amit Narang, Mortgage Broker | Credit Representative 558902 of Outsource Financial Pty Ltd (ACL 384324)
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