Top 10 Ways to Use Equity for Your Next Property

Using equity in your existing home to buy an investment property lets you build a portfolio without needing to save another full deposit.

Your home equity is the difference between what your property is worth and what you owe on it. If your Glen Iris home is valued higher than your mortgage balance, that gap can be used as security for an investment loan. Lenders typically allow you to access up to 80 per cent of your property's value, less what you owe, without needing to pay Lenders Mortgage Insurance. Above that threshold, LMI applies.

This approach is common in Glen Iris, where stable property values and proximity to schools, Gardiner station and the Monash Freeway make homes in the area suitable security for lenders.

How Lenders Calculate Usable Equity

Lenders multiply your property's current value by 80 per cent, then subtract your outstanding mortgage. The result is your usable equity without LMI. Consider a Glen Iris owner whose home is valued around the suburb's current median. If they owe $400,000 on their mortgage, their usable equity sits somewhere in the region of $140,000 to $180,000, depending on the property's exact valuation. That figure can cover a deposit and some purchase costs on an investment property in another suburb or state.

If you're willing to pay LMI, some lenders allow access to equity up to 90 or even 95 per cent of your home's value. That increases the amount available but adds a premium to the cost of borrowing.

Structuring the Loan Across Two Securities

When you use equity to buy an investment property, the loan structure typically involves two securities: your existing home and the new investment property. The lender takes a mortgage over both. Your original home loan may be refinanced or topped up to release equity, and a separate investment loan is established for the purchase. Some borrowers keep the loans in separate accounts to maintain clarity for tax purposes, as interest on the investment portion is deductible while interest on the portion relating to your home is not.

Separating the loan accounts also helps when you eventually want to refinance your investment loan or adjust the structure. If both loans sit in the same account, it becomes difficult to determine which portion of the interest relates to the rental property.

Interest-Only Repayments on Investment Borrowing

Many property investors choose interest-only repayments for the investment portion of their borrowing. Monthly repayments are lower because you're not reducing the principal, which improves cash flow if rental income doesn't fully cover the loan cost. Interest-only periods typically run for one to five years, after which the loan reverts to principal and interest unless you negotiate another interest-only term.

Interest-only lending does not reduce the loan balance, so your equity in the investment property only grows through capital appreciation and rental payments received. If the property remains vacant or if values stagnate, your equity position stays flat.

Serviceability When Borrowing Against Equity

Lenders assess your ability to service both your existing mortgage and the new investment loan. They apply a buffer of at least 3.0 percentage points above the loan product rate and calculate repayments as if the investment loan were on principal and interest terms, even if you're applying for interest-only. Rental income is included but is typically shaded by 20 per cent to account for periods of vacancy and ongoing costs such as body corporate fees, council rates and insurance.

If your total debt-to-income ratio exceeds six times your gross household income, your application may fall within the 20 per cent cap that applies to high DTI lending under current APRA rules. That doesn't mean automatic refusal, but it does mean the lender will scrutinise your application more closely.

Negative Gearing and Recent Legislative Changes

If you acquire an established investment property using equity, the tax treatment of any loss depends on when you exchange contracts. Properties held or under contract at 7:30pm AEST on 12 May 2026 continue to allow full deductibility of losses against all income, including salary. For established properties acquired after that date, losses from the 2027-28 income year onward can only be offset against other residential property income or carried forward. Eligible new builds remain exempt from the restriction and continue to allow losses to be deducted against salary and other income.

In our experience, some Glen Iris owners who were considering a second property accelerated their purchase in the months leading up to the legislative change to preserve access to full negative gearing. Others have shifted their focus to new builds or developments in growth corridors where the exemption applies.

Risk Weighting and Loan Pricing

Investment loans attract higher risk weights under APRA's prudential framework than owner-occupied loans at the same loan-to-value ratio. That feeds through to slightly higher pricing. At current variable rates, you can expect an investment loan to be priced 20 to 40 basis points above an equivalent owner-occupier loan. Fixed rates for investors are also marginally higher. The rate differential reflects the higher capital cost that lenders must hold against investment lending, as well as the statistically higher default rates on investor loans during economic downturns.

Cross-Collateralisation and Future Flexibility

When your existing home and your new investment property are both held as security by the same lender, the arrangement is called cross-collateralisation. It simplifies the initial lending process and may result in lower application costs, but it can limit your flexibility later. If you want to sell one property, refinance with a different lender, or release further equity, you'll need the lender's consent to discharge one of the securities. Some lenders require both loans to be refinanced if you want to move one.

An alternative structure involves taking out the investment loan with a different lender, using a limited guarantee over your home rather than a full mortgage. That keeps the two properties legally separate and makes it simpler to adjust your portfolio as it grows. However, not all lenders offer limited guarantee structures, and they may require a larger deposit on the investment property to compensate for the reduced security.

Portfolio Growth and Timing Your Next Purchase

Once you've used equity to acquire one investment property, the strategy can be repeated as the value of your portfolio increases. If both your home and your first investment property rise in value and you continue to pay down debt, your total equity grows. That equity can then be accessed to fund a third property, and so on. The limiting factor is serviceability. Each additional property adds to your debt servicing obligations and reduces your borrowing capacity for the next purchase, particularly if rental income doesn't fully cover the loan repayments.

Timing matters. Accessing equity and purchasing during a period of stable or rising property values builds wealth more reliably than borrowing at the peak of a cycle when prices are stretched.

Tax Deductions Beyond Interest

Interest on borrowings used to acquire or hold an investment property is deductible, but so are other ongoing costs. Council rates, water rates, property management fees, landlord insurance, repairs and maintenance, and depreciation on the building and fixtures all reduce your taxable income from the property. If you pay LMI on the investment loan, the premium can be claimed as a deduction, either in the year it's paid or spread over five years. Stamp duty on the property purchase is not immediately deductible but forms part of the cost base when you eventually sell, reducing your capital gain.

Keep records of all expenses. The ATO has increased its scrutiny of rental property deductions in recent years, particularly around claims for repairs that should be treated as capital improvements.

Frequently Asked Questions