Understanding Usable Equity in Your Current Property
Usable equity is the portion of your property's value you can borrow against, calculated as 80% of the property's current value minus what you owe. If your home is worth $900,000 and you owe $500,000, your usable equity sits at $220,000. That amount determines whether you can fund a deposit on a second property without selling your existing home.
Most lenders cap borrowing at 80% of a property's value to avoid lenders mortgage insurance on the existing loan, though some will extend to 90% or 95% if you're willing to pay LMI on the increased amount. The calculation changes depending on whether your current property will become an investment after you move or remain your principal place of residence.
Consider a buyer who owns a property valued at $850,000 with $400,000 remaining on the mortgage. At 80% lending, the maximum loan against that property is $680,000. Subtract the $400,000 owed, and $280,000 becomes available as usable equity. If the buyer wants to purchase a second home and needs a 10% deposit plus costs, that equity could support a purchase in the range the deposit covers, depending on their borrowing capacity for the new loan.
How Lenders Assess Your Borrowing Capacity Across Two Properties
Lenders assess your capacity to service both loans simultaneously, not just whether you have equity available. Your income must cover the repayments on your existing mortgage and the new loan, plus meet the lender's buffers and assessment rates, which typically sit 2% to 3% above the actual interest rate.
If your current home becomes an investment property, lenders will include rental income in their assessment, though most only count 75% to 80% of the rental amount to account for vacancies and costs. If you're keeping the existing property as your home and buying an investment, the same rental income rules apply to the new property.
Serviceability often becomes the limiting factor rather than equity itself. A borrower might have $300,000 in usable equity but find their income only supports an additional loan of $180,000 after the lender applies buffers and living expense benchmarks. Running the numbers before committing to a purchase price prevents disappointment at the approval stage.
Structuring Loans When You're Buying Your Next Home to Live In
When you're purchasing a second property to live in and converting your current home to an investment, loan structure affects both your tax position and your flexibility. The debt against the property that becomes an investment should ideally reflect only investment purposes to keep the interest tax-deductible.
Releasing equity from your current home to fund the deposit on your next home creates a problem if that equity is secured against the investment property. The interest on the portion used for private purposes, such as funding a deposit on your new home, won't be deductible even though it's secured against the investment asset.
A cleaner structure involves keeping the existing loan against your current home at its current level or paying it down, then borrowing the deposit and costs for your new home as a separate loan secured against the new property. If you don't have enough deposit saved and need to access equity, some lenders allow you to increase the loan on your existing property and secure that increase against the new property, preserving deductibility. Your broker and accountant should both review the structure before you proceed.
Call one of our team or book an appointment at a time that works for you.
We'll assess your equity and structure your loans correctly.
Does the Property Type of Your Second Purchase Change the Equity You Can Use?
The property you're buying affects how much lenders will lend against it, which in turn impacts how far your equity stretches. Lenders typically lend more conservatively on apartments, particularly in areas with high supply or buildings with known defects, compared to houses on titled land.
If you're using equity from a house to buy an apartment, the lender may require a larger deposit on the apartment than they would on another house, meaning your equity needs to work harder. Units in regional areas or developments with a high investor concentration can also attract lower maximum lending ratios, sometimes capped at 70% to 80% depending on the postcode and building.
Buying your next home often involves balancing what your equity allows with what the lender will support on the new property. A borrower with $250,000 in usable equity might find that amount covers a 20% deposit on a $1,000,000 house in Glen Iris but only satisfies a 15% deposit on a similarly priced apartment in Docklands due to lender policy on that building.
Timing the Valuation and Equity Release Process
Lenders require a valuation of your existing property to confirm the equity available, and that valuation determines the amount you can borrow. Property values shift, and a valuation conducted six months ago won't be accepted for a new application.
Valuations can come in below your expectation, particularly if recent sales in your area have softened or if the lender uses a desktop valuation model that applies conservative adjustments. If the valuation is lower than anticipated, your usable equity shrinks, and you may need to adjust your budget or contribute additional savings.
Ordering the valuation too early in your property search locks you into that figure even if the market has moved upward by the time you're ready to buy. Ordering it too late can delay your finance approval and put your contract at risk if you're working to a settlement deadline. Most brokers recommend triggering the valuation once you're actively looking and have a clear price range in mind, particularly if you're in a rising market.
Managing Risk When You're Holding Two Mortgages
Carrying debt across two properties increases your exposure to interest rate movements, vacancy periods if one or both are investments, and changes in your income. A structure that feels comfortable at current rates can become difficult to manage if rates rise or if your employment situation changes.
Stress testing your position at higher rates gives you a realistic picture of sustainability. If a 2% rate increase would make repayments unmanageable, your buffer is too thin. Lenders assess you at elevated rates, but that doesn't mean the outcome is comfortable in practice, particularly if your income is variable or commission-based.
Holding an offset account against one or both loans provides flexibility to reduce interest without locking funds into the mortgage. If one property is an investment, directing surplus cash flow to the loan against your home reduces non-deductible debt faster, while keeping the investment loan interest fully deductible. Your risk tolerance and cash flow should dictate how much equity you deploy, not just how much a lender is willing to provide.
What Happens If You Want to Access Equity But Keep Your Current Home as Your Residence?
If you're buying a second property as an investment while keeping your current home, the equity release process remains the same, but the tax treatment differs. The interest on any amount borrowed against your home to fund the investment deposit is tax-deductible because the purpose of the borrowing is investment-related.
This approach, often called debt recycling in certain structures, allows you to use equity in a non-deductible asset to build deductible debt. The structure needs careful planning to ensure the funds are used directly for the investment and that the loan purpose is documented correctly.
Lenders will still assess your ability to service both loans, and rental income from the new investment property will be included in that assessment at the discounted rate mentioned earlier. Your total debt increases, and your equity in your home decreases, so the strategy only works if the investment property delivers sufficient return to justify the additional risk and cost.
How Cross-Collateralisation Affects Your Flexibility with Two Properties
Cross-collateralisation occurs when a lender uses both properties as security for both loans. It simplifies the approval process and can sometimes allow you to borrow more or avoid LMI, but it reduces your flexibility to sell, refinance, or restructure in the future.
If both properties secure both loans, you can't sell one property or refinance it to another lender without the existing lender's consent and often without repaying both loans in full. That limitation can become costly if you want to access a lower rate on one property or if you need to sell the investment due to market conditions or personal circumstances.
Where possible, keeping each loan secured only against its respective property preserves your options. Some lenders require cross-collateralisation to approve the loan, particularly if your deposit or equity is tight, but it's worth exploring alternatives or using a different lender if you want to maintain separation. Refinancing to release equity becomes significantly more complex when both properties are tied together.
Call one of our team or book an appointment at a time that works for you. We'll review your current equity position, run the serviceability numbers across both properties, and structure your loans to support your plans without unnecessary restrictions or tax inefficiencies.
Frequently Asked Questions
How much equity can I use from my current home to buy a second property?
You can typically access up to 80% of your property's current value minus what you owe. For example, if your home is worth $900,000 and you owe $500,000, you have approximately $220,000 in usable equity.
Does my current home need to become an investment property when I buy a second home?
Not necessarily. You can keep your current home as your residence and buy an investment property, or move into the new property and convert your current home to an investment. The tax treatment and loan structure differ depending on which option you choose.
Will lenders count rental income when assessing my borrowing capacity for a second property?
Yes, but most lenders only include 75% to 80% of the expected rental income to account for vacancy periods and costs. Your income must still cover both mortgage repayments plus the lender's buffers and assessment rates.
What is cross-collateralisation and should I avoid it?
Cross-collateralisation means both properties secure both loans, which limits your ability to sell or refinance one property independently. Where possible, keeping each loan secured against its own property preserves flexibility for future decisions.
Can I use equity from my home to fund an investment property deposit and claim the interest as a tax deduction?
Yes, if you borrow against your home specifically to fund an investment property purchase, the interest on that borrowing is generally tax-deductible. The loan purpose must be clearly documented and the funds used directly for the investment.
