Everything You Need to Know About Using Equity to Buy Investment Property

Using equity in your home to purchase an investment property allows you to enter the market without saving another full deposit.

The principle is straightforward. If your home is worth more than you owe, that difference can be used as security for a second loan. Lenders assess both properties together, calculate your total borrowing position, and may approve you for an investment property finance package without requiring additional cash savings. The approach is commonly used by property investors across Mandurah and throughout Australia to build a portfolio while retaining the home they live in.

How Lenders Calculate Available Equity

Your available equity is the difference between what your property is worth and what you owe, multiplied by the maximum loan to value ratio the lender permits.

Most lenders cap total lending across both properties at 80 per cent of the combined security value to avoid Lenders Mortgage Insurance, though some will lend higher. As an example, consider a homeowner in Mandurah whose property is valued at $600,000 with a remaining mortgage of $300,000. At 80 per cent, the lender would allow total borrowing of $480,000. Subtract the existing $300,000 loan, and $180,000 becomes accessible for deposit, stamp duty and related costs on the next purchase. That figure funds the investor deposit and settlement costs without liquidating other assets.

Refinancing your existing home loan to release this equity is often bundled into the same application as the new investment loan, allowing both to settle at the same time.

Structuring the Investment Loan Separately

The investment loan should be set up as a standalone facility with its own account, even though both loans may share the same lender.

This separation preserves the deductibility of investment loan interest. If you were to redraw equity from your home loan and use it to buy an investment property, the portion used for investment purposes remains deductible, but tracking becomes complicated if funds are mixed. A separate loan simplifies record keeping and protects the tax benefits over the life of the investment. Interest on borrowings used to acquire or hold rental property is fully deductible against rental income, provided the property is genuinely available for rent.

Keeping each loan quarantined also allows different repayment structures. Many investors choose interest only repayment on the investment loan to minimise monthly outgoings and maximise cash flow, while continuing principal and interest repayment on the owner-occupied mortgage.

Interest Only Versus Principal and Interest for Investment

Interest only repayment reduces the monthly cost of servicing the investment loan amount, leaving more rental income in your pocket or reducing the gap you fund each month.

Under an interest only arrangement, you pay only the interest charged each month without reducing the principal. This is typically available for five years, renewable subject to lender assessment. The loan balance remains unchanged during the interest only period. Once the period expires, the loan reverts to principal and interest unless you negotiate an extension. The lower repayment improves cash flow and may increase your borrowing capacity when lenders assess serviceability, because the repayment tested is smaller.

Principal and interest repayment builds equity in the investment property from day one and reduces total interest paid over the life of the loan. Some investors prefer this approach if they plan to hold the property long term and want to own it outright before retirement. Both structures are valid. The decision depends on whether you prioritise cash flow now or debt reduction over time.

Serviceability Under the Debt-to-Income Cap

Lenders test whether you can afford both loans at a higher interest rate than the actual product rate, and since February this year, some borrowers are subject to a debt-to-income cap.

The serviceability buffer adds three percentage points to the interest rate when calculating whether you can meet repayments. If the variable interest rate on your investment loan is 6.5 per cent, the lender tests serviceability at 9.5 per cent. On top of this, the Australian Prudential Regulation Authority now limits the proportion of new investor loans a lender can write at a debt-to-income ratio of six times or higher. If your total borrowing across all debts exceeds six times your gross annual income, the lender may decline the application or reduce the loan amount, even if you pass the interest rate buffer test.

This cap affects borrowers with high existing debt or those seeking large investment loan amounts relative to income. One way around the cap is to structure the investment property finance with a lower loan to value ratio, requiring a larger deposit or more accessible equity. Another is to increase rental income assumptions, though lenders typically discount projected rent by 20 per cent to account for vacancy and maintenance.

Tax Treatment of Investment Property Under Current and Future Rules

Interest, property management fees, council rates, insurance, repairs and depreciation are all claimable expenses against rental income, reducing your taxable income each year.

If rental income is less than total expenses, the property is negatively geared and the loss can be offset against your salary or other income, reducing the tax you pay. For properties acquired before 7:30pm on 12 May 2026, this arrangement continues indefinitely under grandfathering provisions in the Treasury Laws Amendment (Tax Reform No. 1) Act 2026. For properties acquired after that date and time, negative gearing is quarantined from 1 July 2027. Losses can only be offset against other residential rental income or carried forward to reduce future rental income or capital gains on residential property. They cannot reduce salary or wage income.

Eligible new residential dwellings remain exempt from the quarantine, meaning you can still negatively gear a newly constructed property or one that increases the dwelling count on a site. A knock-down rebuild that replaces one home with one home does not qualify. Buyers acquiring investment property using equity should confirm the acquisition date and whether the dwelling meets the new build definition before finalising the purchase contract.

Choosing Variable or Fixed Investment Loan Interest Rates

Variable rates allow you to make extra repayments, access offset or redraw features, and benefit from rate cuts without penalty.

Fixed rates lock in your repayment amount for a set period, usually one to five years, protecting you from rate rises but also preventing you from benefiting if rates fall. Break costs apply if you repay the loan early or refinance before the fixed term ends. Many property investors split the investment loan between variable and fixed portions to manage risk while retaining some flexibility. Under a split arrangement, you might fix 50 per cent of the loan amount at a known rate and leave the other 50 per cent variable with an offset account attached.

Offset accounts linked to the variable portion reduce the interest charged without affecting deductibility, provided you do not deposit non-investment funds into the account. An offset holding $20,000 linked to a $400,000 variable rate investment loan means you only pay interest on $380,000. The tax deduction remains calculated on the full $400,000 loan balance.

Mandurah's Rental Market and Vacancy Considerations

Mandurah's rental market has tightened over recent years, driven by sea change demand and limited new stock in established suburbs close to the marina and foreshore.

Vacancy rates in pockets near Halls Head and Meadow Springs have remained low, supporting rental yields for investors who purchase well-maintained properties within walking distance of schools and shopping precincts. Lenders apply a vacancy rate assumption when calculating rental income for serviceability, typically shading projected rent by 20 per cent. If a property is advertised at $600 per week, the lender will assess serviceability using $480 per week. Rental income improves your borrowing capacity, but it does not offset the full cost of the loan in the lender's calculation.

Body corporate fees for units and townhouses also reduce net rental income and must be declared in the investment loan application. Investors targeting Mandurah's canal estates or apartment complexes near the train station should confirm strata levies before committing, as these can exceed $2,000 per quarter in some developments.

Application Process and Lender Assessment

Applying for an investment loan using home equity involves a valuation of both the existing property and the one you intend to purchase.

Lenders order the valuations once the application is lodged. If either property comes in below the contract price or your estimated value, the amount of equity available shrinks and the loan may need to be restructured. Borrowers should avoid overstating property values in the initial discussion, as a low valuation later in the process can delay settlement or require renegotiation with the seller.

You will need to provide recent payslips, tax returns if self-employed, details of existing debts, and a signed contract of sale for the investment property. Lenders assess your income, existing commitments, living expenses, and the rental income the new property will generate. Rental income is verified by a lease agreement if the property is tenanted, or a rental appraisal from a licensed property manager if it is vacant. Most lenders accept an appraisal from the selling agent, though some prefer an independent assessment.

When Refinancing Makes Sense for Equity Release

If your current lender will not release enough equity or offers an uncompetitive rate on the investment loan product, refinancing both loans to a new lender may deliver a lower blended rate and higher borrowing capacity.

Refinancing allows you to consolidate your home loan and investment loan under one lender, often securing rate discounts for holding multiple products. It also resets your loan to value ratio based on current property values rather than the price you originally paid. If your home has increased in value since purchase, refinancing captures that gain and converts it into usable equity without selling. The downside is the time and cost involved in discharging the old loan, settling the new loans, and paying for fresh valuations and legal fees.

Refinancing makes the most sense when the rate saving or additional equity accessed exceeds the switching costs within 12 to 24 months. A mortgage broker can model the break-even point and present investment loan options from lenders you may not have direct access to, including those with appetite for higher loan to value ratio lending or more flexible serviceability treatment of rental income.

Call one of our team or book an appointment at a time that works for you to discuss your equity position, compare investment loan features across lenders, and structure both loans to suit your circumstances and timeline.

Frequently Asked Questions