Using equity to buy an investment property is something a lot of established homeowners start thinking about once their home loan has reduced or the property has increased in value.
On paper, the idea sounds fairly simple.
You have equity in your home, you release some of it, and use that towards the deposit and costs for the investment property.
In practice, there are a few more moving parts.
You need to understand how much equity is actually usable, whether your borrowing capacity supports the next purchase and how the lending should be structured.
What Does Using Equity to Buy an Investment Property Actually Mean?
Equity is simply the difference between what your property is worth and what you currently owe against it.
For example, if your home is worth $1.8 million and your home loan is $800,000, you have $1 million in equity on paper.
That does not mean the bank will allow you to access the entire $1 million.
The lender will have limits around how much they are prepared to lend against the property, and they will still assess whether your income can support the extra debt.
So there is an important difference between total equity and usable equity.
How Much Equity Can You Actually Use?
The amount you may be able to access depends on things like the property value, existing loan balance, the lender’s maximum LVR and your overall borrowing position.
Many borrowers are surprised to find that the amount of equity sitting in the home and the amount they can actually release are quite different.
This is why I prefer to work out the numbers before looking too seriously at the next property.
We can establish roughly how much equity may be available and then work out what purchase price that could support.
Equity Can Help Fund the Deposit and Purchase Costs
For many investors, the main reason for accessing equity is to avoid having to fund the entire deposit from cash savings.
A separate equity loan may be able to help cover things such as the deposit, stamp duty, legal costs and other purchase costs.
The investment property itself would then generally have its own separate loan.
That can allow you to keep more cash available rather than putting all of your savings into the transaction.
But I do not think the goal should simply be to use as much equity as possible.
There still needs to be a sensible cash and equity buffer left after the purchase.
Borrowing Capacity Still Matters
This is probably the most important part.
Having plenty of equity does not automatically mean you can borrow enough to buy another property.
The lender still needs to assess whether your income can support the total debt after the purchase.
That means looking at your existing home loan, any investment debt, credit cards, car finance, household expenses and the proposed investment loan.
They will also assess the expected rental income from the new property.
So you can have substantial equity available and still be limited by servicing.
Related: See Borrowing Capacity for Your Next Property: What Can You Actually Afford?
Keep the Equity Loan Separate
If you are releasing equity from your home for an investment purchase, I generally prefer to keep that borrowing in its own loan split.
For example, you might have:
- Your existing home loan
- A separate equity split for the investment deposit and costs
- A separate loan secured by the new investment property
This keeps the purpose of each loan much clearer.
It also avoids unnecessarily mixing personal and investment borrowing together.
The tax treatment of interest and deductibility should always be confirmed with your accountant or tax adviser, but from a lending point of view, I like the structure to be easy to follow.
Do You Need to Use Your Current Bank?
Not necessarily.
A lot of people assume that because the equity sits with their existing lender, the whole transaction needs to stay with that bank.
Sometimes that is the right option.
Sometimes it is not.
Your existing lender may be competitive on the home loan but not give you the borrowing capacity you need for the investment purchase.
Another lender may assess your income, rental income or existing debts more favourably.
There can also be situations where we leave the home loan where it is and use another lender for the investment purchase.
The right structure depends on the overall position.
Cross-Collateralisation Is Worth Understanding
This is another area where structure matters.
Some lenders may want to take both the existing home and the new investment property as security for the lending.
That can make the transaction look simpler initially, but it can also tie the properties together.
If you later want to sell one property, refinance one loan or move part of the lending elsewhere, it can become more complicated.
That does not mean cross-collateralisation is always wrong.
There are situations where it may make sense.
But I think clients should understand what is being secured where before they agree to the structure.
Existing Investment Loans Can Affect the Next Purchase
If you already own one or more investment properties, the lender will assess the entire portfolio.
This is where things can get more complicated.
The bank will generally shade rental income rather than use 100% of the rent you receive.
At the same time, they will assess your existing loans at higher assessment rates rather than simply use your actual repayments.
Interest-only debt can also reduce borrowing capacity more than people expect because the lender may assess the principal repayment over the remaining loan term.
So the way your portfolio looks in real life and the way it looks in the bank’s servicing calculator can be quite different.
Related: See Why Your Existing Investment Loans Can Limit What You Borrow Next.
You Do Not Have to Use Every Dollar Available
Just because a lender is prepared to release a certain amount of equity does not mean you need to take all of it.
I prefer to look at how much is actually required for the purchase and what the position looks like afterwards.
How much cash will you have left?
How much equity remains in the home?
What happens if the investment property is vacant for a period?
What happens if you need money for repairs or something unexpected at home?
Borrowing the absolute maximum can leave very little room if something changes.
The loan needs to work outside the servicing calculator as well.
Think About the Next Purchase After This One
For someone building an investment portfolio, I also want to understand what may come next.
Is this likely to be the only investment property?
Are you hoping to buy again in a few years?
Will you eventually upgrade the family home?
Those questions can affect how we structure the lending today.
A structure that gets the first investment property approved may not necessarily put you in the best position for the second or third.
That is why I prefer to look a little further ahead rather than treating each loan as a separate transaction.
Work Out the Full Position Before You Buy
Using equity can be a useful way to fund an investment property purchase.
But the equity itself is only one part of the equation.
We also need to understand your borrowing capacity, the loan structure, how much cash you want to keep available and which lender suits both the current purchase and what you may want to do later.
It is much easier to work through those decisions before you have found a property and need an approval quickly.
Thinking About Your Next Investment Property?
If you have built up equity in your home and are considering an investment property, we can work through how much may be available and what the overall lending position looks like.
Book a strategy call with me and we can look at your current home loan, available equity, borrowing capacity and how the next purchase could be structured.
