Beginner's Guide to Using Home Equity for Investment

What Home Equity Means for Your Second Property Purchase

Home equity is the portion of your property you own outright after subtracting what you still owe on the mortgage. If your property has increased in value since you bought it, or you've paid down your loan, that equity can be used as a deposit for an investment property without needing to save another full deposit in cash.

Most lenders will let you borrow against up to 80 per cent of your current property's value, leaving you with 20 per cent equity as a buffer. Anything above that loan-to-value ratio typically means paying Lenders Mortgage Insurance, which can run into thousands of dollars and eats into your return.

How Equity Release Works in Practice

Consider a public servant who bought a unit five years ago for a purchase price near the area median and now has a loan balance of $280,000. If the property is now valued at $420,000, the available equity is $140,000. At 80 per cent LVR, the lender permits a total loan of $336,000 against that property. Subtract the existing $280,000 loan and $56,000 becomes available for the deposit and costs on a second property.

That $56,000 covers a 10 per cent deposit on a property around $400,000, plus stamp duty and other settlement expenses depending on the jurisdiction. The existing home remains in place as security, and the new purchase is funded through a combination of the released equity and a separate investment loan secured against the new property.

The Difference Between Refinancing and a Standalone Investment Loan

Refinancing your existing home loan to release equity means consolidating everything with one lender under a new loan structure. A standalone investment loan keeps your current home loan untouched and finances the new property separately, sometimes with a different lender entirely.

Refinancing can simplify things if your current rate is uncompetitive or you want all your lending in one place. The downside is breaking a fixed rate early can trigger thousands in exit costs, and you lose any rate discount negotiated on your original loan unless the new lender matches it. A standalone investment loan preserves your existing loan terms and lets you shop around for an investor rate that suits the new property.

Interest-Only Repayments and Rental Income

Investment loans are often structured as interest-only for the first few years, meaning your repayments cover only the interest charged each month without reducing the principal. This keeps the monthly payment lower, which can be important when the rental income needs to cover most or all of the holding costs.

Say the investment property rents for $450 per week. Over a year that's $23,400 before vacancy and management fees. If you're paying interest-only at current variable rates, the annual interest on a $360,000 loan sits somewhere near $22,000 to $25,000 depending on the lender and your borrowing profile. Add in council rates, insurance, property management and body corporate fees, and the property might run at a small loss each year. That loss is deductible against your salary under current negative gearing rules, which still apply to properties purchased before the changes that came into effect from the 2027-28 income year.

DTI Limits and Public Sector Income Stability

From February this year, lenders have been required to limit the proportion of new investor loans to borrowers with a debt-to-income ratio of six times or greater. That means if your total household income is $120,000, your combined home and investment borrowing generally can't exceed $720,000 unless you fall within the lender's 20 per cent exception quota.

Public sector employment is regarded as stable income by most lenders, which can work in your favour when serviceability is tight. Your salary is documented, your employment is ongoing, and there's less perceived risk compared to casual or contract roles. Even so, the lender still tests your ability to service both loans at a rate three percentage points above the actual loan rate, and rental income is usually shaded by 20 per cent to account for vacancy and non-payment.

Tax Treatment and What's Changed Since Mid-Last Year

For properties purchased before the cut-off in May last year, interest and all other holding costs remain fully deductible against your total assessable income, including your public sector salary. If the property makes a loss, that loss reduces your taxable income and can result in a refund at tax time.

For established properties purchased after that date, losses can only be offset against income from other residential properties, not against wages. Excess losses carry forward to future years. New builds are exempt from that rule, so if you're buying an investment property off the plan or newly completed, the old negative gearing treatment still applies regardless of when you buy.

LMI Waivers and Equity Positions Above 80 Per Cent

Some lenders offer LMI waivers for public servants borrowing above 80 per cent LVR on owner-occupied loans, but those waivers rarely extend to investment lending. If you're pulling equity from your home and the combined borrowing pushes your original property above 80 per cent LVR, you'll likely pay LMI on that portion.

One way around this is to structure the equity release so your existing property stays at or below 80 per cent, even if it means contributing some cash savings to top up the deposit on the investment property. Running the numbers with your broker before you commit to a purchase price can save several thousand dollars in insurance premiums.

Holding Costs, Vacancy Rates and Cash Flow

Even with rental income and tax deductions, an investment property usually requires ongoing cash contributions to cover the gap between income and expenses. In areas with higher vacancy rates or seasonal tenant turnover, that gap widens.

Budget for at least two weeks of vacancy per year as a baseline, and more if the area has a history of longer turnovers. Property management fees typically run between 6 and 8 per cent of the rent collected, plus letting fees when a new tenant moves in. Body corporate fees for units can range from $1,000 to $5,000 annually depending on the building and included services. All of these are claimable expenses, but they still need to be paid upfront.

Why Standalone Investment Loans Sometimes Make More Sense

If your current home loan is on a low fixed rate locked in before rates rose, refinancing everything just to access equity can cost you more over the remaining fixed period than keeping that loan in place and taking out a separate facility for the investment.

A standalone investment loan also gives you flexibility to choose a different loan structure for the investment property. You might want interest-only on the investment to maximise deductions and principal-and-interest on your home to pay it down faster. Splitting the lending across two lenders or two products lets you tailor the repayment strategy to each property's purpose.

Call one of our team or book an appointment at a time that works for you. We'll calculate your available equity, compare refinance and standalone options, and walk through the tax and cash flow position based on the property type and location you're considering.

Frequently Asked Questions