How Can Equity Be Used to Buy an Investment Property?

Using equity to buy an investment property involves borrowing against the increased value of your current home to fund the deposit and upfront costs of a new property. This allows you to purchase an investment without needing to save a new cash deposit.

How home equity works

Equity is the difference between your property’s current market value and the amount you still owe on your mortgage. As you pay down your loan and as your property increases in value, your equity grows. Lenders generally allow you to borrow up to 80% of your property's value (minus your existing loan) without paying Lenders Mortgage Insurance (LMI). This is often referred to as your usable equity.

Illustrative example

Illustrative example: You own a home valued at $800,000 and your current loan balance is $400,000.
80% of the property value is $640,000.
Subtracting your existing loan ($400,000) leaves you with $240,000 of estimated equity above an 80% LVR. This $240,000 could potentially be accessed to cover the deposit and stamp duty for an investment property.

What may change the outcome

Your ability to access equity depends on a formal bank valuation of your property, not just a real estate agent's estimate. Furthermore, having equity is only one part of the equation; you must also have the income to service (afford) the repayments on both your existing home loan and the new investment loan.

Common misunderstandings

Many homeowners believe they can use 100% of their property's increased value. In reality, lenders usually cap borrowing at 80% of the property's value to avoid LMI, meaning your usable equity is often lower than your total equity.

When a personal review may help

Structuring investment loans correctly is crucial for tax purposes and risk management. A broker can help you understand whether you should cross-collateralise the properties or keep the loans separate, and how much equity you can practically access based on your income.

Next step

Estimate your usable equity using our Equity Position Calculator, or learn more on our Property Investors service page.

This article provides general information only and does not take into account your objectives, financial situation or needs. It does not constitute personal credit, financial, tax or legal advice. Lending outcomes depend on individual circumstances, lender policy and assessment.

Have questions about your situation?

Every home loan scenario is unique. Speak directly with Cameron or Matthew to get clear answers.