Using equity to buy an investment property: how much you can really use, and how to set it up

Can you use equity to buy an investment property?

Yes. Using equity to buy an investment property means borrowing against the home you already own to pay the new property's deposit and buying costs, then borrowing the rest against the investment itself. You don't need the deposit in cash. The lender treats your home's equity as the deposit.

Three things decide whether it works: how much of your equity a lender will let you use (parts 2 to 4), whether your income can carry both loans at the lender's test rate (parts 15 to 17), and how the loans are set up (parts 10 to 12). The first is the one people tend to think about; the third is the hardest to fix later.

How much equity can I use?

The equity you can use is usually 80% of your home's value, less everything you owe on it. Your equity is the value minus the loan. Your usable equity is smaller, because once your LVR, the loan as a share of the property's value, passes 80%, lenders mortgage insurance (LMI) normally applies [1]. LMI is insurance that protects the lender, and you pay for it.

On a $900,000 home with $400,000 owing, your equity is $500,000. Your usable equity is 80% of $900,000, which is $720,000, less the $400,000 you owe: $320,000 [6]. That's the number that decides what you can buy, and it's $180,000 smaller than many people expect.

A lender can lend past 80% with LMI, but that's a cost on top. And each lender sets its own rules on how much it will release and what for (part 20).

How do I work out my usable equity?

To work out your usable equity, multiply your home's likely value by 0.8, then take off everything you owe on it, including any redraw you've used. What's left is what you can borrow against before LMI would apply [1]. That's the whole calculator: three lines.

What this means for you: the gap between equity and usable equity is always 20% of the value. On a $1,200,000 home that's $240,000 you can see on paper but can't use without paying LMI.

Who decides what my home is worth?

The lender decides what your home is worth, through its own valuation, not your estimate, an agent's opinion or a website's figure. If the valuation comes in lower than you hoped, your usable equity shrinks by 80 cents for every dollar the value falls short.

That's why the valuation comes first, before you look at properties. A $50,000 lower valuation takes $40,000 off what you can use.

Example of using equity to buy an investment property, start to finish

An illustration, not a client file. A $900,000 home with $400,000 owing. You buy a $650,000 investment property in Western Australia, where the general transfer duty (stamp duty) on $650,000 is $24,890 [4]. We've allowed $5,110 for legal and other costs, so duty and costs come to $30,000. Duty differs by state: see the stamp duty calculator.

At an illustrative 6.0% over 30 years, principal and interest, the two loans cost about $6,475 a month before rent. A lender tests them at least 3 percentage points higher, about 9%, which is about $8,690 a month [2][6]. That's why the next question isn't equity but income (part 15).

Does using equity increase my mortgage?

Yes. Using equity increases the loan on your home by the amount you release, and that new borrowing is repaid like any other. In the example, the home loan goes from $400,000 to $560,000, and its repayment at 6.0% rises from about $2,398 to about $3,357 a month, about $959 more. Each $100,000 released costs about $600 a month at 6.0% over 30 years, principal and interest [6].

Here's the part people miss: using equity doesn't change how much you owe in total. You borrow the whole price plus the costs either way. What equity changes is which property carries the debt, and whether you pay LMI.

Can equity be used as a deposit?

Yes, equity can be used as a deposit. The equity you release pays the deposit and the buying costs, so you don't need savings for them. But it's still borrowed money: you pay interest on it from day one, and your home secures it.

Lenders still look at your income, your debts and your spending, even when the deposit comes from equity, because they want to see you can manage the bigger repayments. It's worth keeping some cash aside too, for the costs a property throws up in its first year.

Can I borrow 100% for an investment property?

Not against the investment property alone. Lenders cap how much they'll lend against one property's value: CommBank, for example, publishes that it won't lend more than 95% of a property's value [8]. What using equity does is spread the borrowing across two properties. Against your home and the investment together, you can borrow the whole price and the costs, as the example does.

So the honest answer is that, if a lender agrees, you can buy without cash of your own, but you're borrowing more than 100% of the new property's price, and both properties carry it.

Can you buy an investment property with less than 20% deposit?

Yes, you can buy an investment with less than a 20% deposit, but above 80% of the investment's value you'll usually pay LMI. On the example's $650,000 property with a 10% deposit, the loan is $585,000, and one lender's published rate card puts LMI at 2.100% of that, about $12,285, before the extra the card adds for an investment loan [1][6]. Your premium depends on the insurer, the loan and the lender.

Some professionals can skip LMI on an investment. ANZ and NAB, for example, extend their professional LMI waivers to investment loans, for the roles below [7]. The full list of who waives LMI, and for whom, is on the LMI waiver page.

What this means for you: a 10% deposit on the investment leaves more equity in your home for the next purchase. In the example, you'd release $95,000 instead of $160,000, your home loan would be $495,000 (55% of its value), and you'd still have $225,000 of usable equity left, against $160,000 on the 20% route [6]. The total you owe is the same $1,080,000.

What is cross-collateralisation?

Cross-collateralisation is when two or more properties secure the same lender's loans together, so the lender holds both titles against all the debt. It's often what a lender offers first, because it's simple to set up. The other way is stand-alone: the equity release is a separate loan secured only by your home, and the investment loan is secured only by the investment.

Why is cross-collateralisation hard to undo?

Cross-collateralisation is hard to undo because every change to one property involves the other. When both properties secure one lender's loans, selling one usually means the lender decides how much of the sale proceeds goes to the debt, and it can ask for more than you expected if the other property's value has fallen.

Moving one loan to a better rate means refinancing both. Unpicking it later costs valuations, fees and time, and sometimes isn't possible on the terms you want. The cheapest time to get the structure right is before you buy.

How should the loans be set up so you can sell either one?

The structure to ask for is two separate loans: the deposit and costs as a new loan, or a separate split, against your home, and the investment loan against the investment property alone. Ideally, each is set up so it could sit with a different lender.

In the example, that's a $160,000 split against your home, beside your existing $400,000, and a $520,000 loan against the investment. If you later sell the investment, its loan is repaid from the sale and your home loan isn't touched.

What this means for you: asking for this structure at the start is far simpler than unpicking a cross-collateralised one later, and it keeps every later choice open: selling, refinancing or using the equity again.

Why keep the borrowed deposit in its own split?

Keep the equity you release for the investment in its own loan split, used only for the investment's deposit and costs. Mixing it with money for your own spending makes the interest harder to work out later.

Whether the interest is deductible depends on what the money is used for. That's a question for your accountant, not a broker, and a clean split makes their answer easy. The same idea is behind debt recycling.

Should the investment loan be interest only?

Interest only on the investment loan lowers the repayment for a set time, but the loan doesn't shrink and the repayment jumps when the period ends. Lenders are also stricter about it: CommBank's lending policy, for example, allows interest only up to 90% of an investment's value, with LMI above 80% [9].

Lenders test whether you could afford the higher repayment once interest only ends, so it can lower what you can borrow. The repayments, the step-up and when each suits are on interest only or principal and interest.

Can I afford an investment property using equity?

Whether you can afford an investment property using equity comes down to your income, not your equity. Equity solves the deposit. It doesn't solve the repayments. The lender adds up both loans and tests whether your income, plus part of the expected rent, covers them at a rate at least 3 percentage points above the one you'd pay [2].

In the example, that's about $6,475 a month at 6.0% and about $8,690 a month at the test rate, a gap of about $2,215 a month [6]. A household that can only just manage the first figure won't pass the second.

Lenders also count your other debts, usually every credit card at its full limit, and their own view of your living costs. See how much can I borrow.

Does APRA's debt-to-income limit affect investors?

Yes. APRA's debt-to-income limit caps each bank at 20% of its new lending to people whose total debts are six or more times their income, and it counts investor lending separately from owner-occupier lending [3]. A household on $160,000 with the example's $1,080,000 of debt is at 6.75 times [6].

What this means for you: above six times, you're in the share of lending each bank has to limit. A bank close to its limit may be more cautious; another may still lend. Which bank, and when, matters more once you own two properties.

How do lenders count rental income?

Lenders count the rent you expect from the investment, but usually not all of it, to allow for vacancies, management and costs. For a purchase, they'll want a rental appraisal from an agent; for a property you already rent out, the lease.

So a property that "pays for itself" on the full rent often doesn't on the lender's numbers. Lenders differ in how much of the rent they count, which is one reason two lenders give two different answers on the same investment.

Can I lose my home if I use its equity?

Yes, it's possible. When you use equity, your home secures the investment's deposit, so if you couldn't keep up the repayments on that borrowing, it's your home that secures it. That's the real risk of borrowing against your home, and it's why the repayments at the test rate matter more than the rent on paper.

Values can fall too. An illustration: if both properties in the example fell 10%, your home would be worth $810,000 and the investment $585,000. The investment loan would then be 89% of its value, and your usable equity would shrink from $160,000 to $88,000 [6]. You'd still owe $1,080,000.

Leave room: don't use every dollar of usable equity, and keep a buffer you could live on if the property sat empty for a few months.

Will the lender ask what the equity is for?

Yes. Lenders want to know what released equity is for, and some ask for proof. Firstmac's published policy, for example, treats any money paid out to you as cash out, whatever it's for. It wants the purpose clearly identified, and won't accept "future investment" or "personal use" without detail. Up to $100,000, at 80% of the value or less, clear details are enough; above $100,000 it wants documents, such as a contract of sale [5].

What this means for you: releasing a large amount "for an investment" before you've found the property can be harder than releasing it with a contract in hand. Pre-approval on both loans is usually the cleaner order (part 22).

Can I use equity again to buy another property?

Yes, if there's usable equity left and your income can carry the next loan. In the example, after the purchase your home still has $160,000 of usable equity (80% of $900,000, less the $560,000 now owed), and the investment has none until its value rises or its loan falls [6].

Each purchase uses equity and income. Equity grows back as values rise and loans are repaid; income usually runs out first. The order you buy in, and keeping every loan stand-alone, decide whether you can keep going. See how we built a portfolio, step by step.

What does a broker cost you?

How a broker is paid, and the rule Money Brain holds against it, is set out in full on its own page: what a mortgage broker costs.

Your first move

You've read how lenders treat equity. Now there's one question left: how much of your home's equity can you use, and can your income carry both loans at the test rate? That depends on your home's value, what you owe, your income and the price you have in mind, and it's what Money Brain works out before anything goes to a lender.

When you're ready, the closing section below is the simplest way to start.