10 Ways to Use Home Equity for Investment Property

The equity in your current home can fund the deposit for an investment property without waiting years to save cash.

Pharmacy assistants who've built equity in a home over several years often overlook it as a funding source for property investment. Accessing that equity means you can enter the investment market sooner, provided your income supports the additional borrowing and you understand the lending conditions that apply from mid-2026 onward.

What Home Equity Means for Investment Property Purchases

Home equity is the difference between what your property is worth and what you owe on it. Lenders allow you to borrow against a portion of that equity to fund a deposit on another property. Most lenders cap total borrowing at 80 per cent of your home's value to avoid Lenders Mortgage Insurance, though some will lend up to 90 or 95 per cent if you're prepared to pay the premium.

Consider a pharmacy assistant who bought a unit several years ago. The property is now valued higher, and the mortgage balance has reduced through regular repayments. If the unit is worth $550,000 and the loan balance sits at $380,000, there's $170,000 in equity. Borrowing up to 80 per cent of the property's value means total lending of $440,000. After repaying the existing $380,000 loan, $60,000 becomes available as a deposit for an investment property.

How Lenders Assess Your Investment Loan Application

Lenders calculate serviceability by adding the new loan repayments to your existing commitments and applying a buffer of 3 percentage points above the product rate. They also assess rental income, typically accepting 80 per cent of the expected rent to account for vacancy and maintenance periods. From February this year, debt-to-income caps also apply, limiting how much you can borrow relative to your gross income, though these caps are applied separately to owner-occupied and investor lending.

A pharmacy assistant earning $55,000 a year with an existing mortgage of $380,000 and minimal other debt would need to demonstrate that both loan repayments, plus the buffer, fit within their income after living expenses. The anticipated rental income from the investment property helps, but lenders apply a discount to that figure and don't count it dollar-for-dollar.

Using Equity Release Without Refinancing Your Home Loan

You can access equity by taking out a separate loan secured against your home, leaving your existing mortgage untouched. This approach works when your current home loan has a lower rate or features you want to keep, such as an offset account or a fixed rate that hasn't yet expired. The equity loan funds the deposit and associated costs for the investment property, while a second loan is taken out to cover the purchase price of the new property.

Alternatively, refinancing your home loan into a single facility with a higher limit can simplify the structure and sometimes deliver a lower rate, particularly if your existing loan was taken out several years ago. The choice depends on your current loan terms, break costs if applicable, and whether consolidating the debt offers any advantage in rate or flexibility.

Interest Only Repayments on Investment Loans

Many investors choose interest only repayments for the first few years of an investment loan to reduce monthly outgoings and preserve cash flow. Under an interest only arrangement, you pay only the interest charged each month without reducing the loan balance. This keeps repayments lower and can improve tax outcomes, because the full loan balance remains deductible for longer.

The downside is that you're not building equity in the investment property through loan repayments, and once the interest only period ends, repayments revert to principal and interest at a higher amount. Interest only terms typically run for one to five years, depending on the lender and the loan product. You need to plan for the repayment increase when the term expires or refinance to extend the interest only period if your circumstances and the lender's criteria allow.

Tax Treatment Changes from July 2027

From 1 July 2027, net rental losses on residential investment properties purchased after 12 May 2026 can only be offset against other residential rental income or carried forward. They can't be used to reduce your salary or wage income in the same way they can under current rules. Properties purchased before that date, or under contract before 7:30pm on 12 May 2026, remain unaffected and can continue to be negatively geared against any income.

The change also introduces different treatment for newly built dwellings that increase the housing supply. If you buy a new build that qualifies under the legislation, you retain full access to negative gearing regardless of when you purchase. A knock-down rebuild that doesn't add to the dwelling count won't qualify, nor will a new build that's been occupied for more than 12 months before you buy it.

This creates a distinction between established properties and qualifying new builds that didn't exist before. If you're planning to use equity to buy an investment property in the next 12 months, the type of property you choose will affect your tax position for as long as you hold it. It won't change your borrowing capacity directly, but it will influence your after-tax return and the cash flow required to hold the property during any period when expenses exceed rental income.

Loan to Value Ratio and Lenders Mortgage Insurance

Loan to value ratio measures total borrowing against the security property's value. For investment purchases, most lenders prefer to stay at or below 80 per cent LVR to avoid Lenders Mortgage Insurance. If you're using equity from your home and borrowing the balance to buy an investment property, the LVR calculation applies to each property separately.

Lenders Mortgage Insurance protects the lender if you default, not you. The premium is calculated as a percentage of the loan amount above 80 per cent LVR and can add several thousand dollars to your upfront costs. Some lenders offer LMI waivers for certain occupations, though eligibility for pharmacy assistants is less common than for pharmacists. If you can access sufficient equity to keep each loan below 80 per cent of the respective property value, you avoid the insurance cost entirely.

Structuring Loans for Future Flexibility

When you borrow against your home to fund an investment deposit, you're creating a debt secured by your home but used to acquire an income-producing asset. The interest on that portion of the borrowing is deductible against your rental income, provided the funds are used directly for the investment property purchase or related costs such as stamp duty.

Keeping the equity loan separate from your original home loan, or splitting your refinanced loan into clearly defined portions, makes it simpler to track which interest is deductible and which isn't. Mixing investment and private debt in a single account, then redrawing for personal expenses, can blur the line and reduce your deductions. Most brokers recommend a split loan structure or separate facilities to maintain clarity for tax purposes.

How Rental Income Affects Your Borrowing Capacity

Lenders include rental income when calculating how much you can borrow for an investment property, but they don't count the full amount. A shading factor, typically 20 per cent, is applied to account for periods when the property sits vacant or requires maintenance. If the expected rent is $500 per week, the lender will assess serviceability using $400 per week as income.

The actual rental yield will depend on the location and type of property you buy. Units in higher-density areas often deliver stronger yields than detached houses, while properties in regional areas may offer higher percentage returns than metro markets but come with different demand and vacancy patterns. You need to factor in body corporate fees for units and strata properties, as these reduce your net rental income and are treated as an ongoing expense by the lender.

Variable Rate vs Fixed Rate for Investment Loans

Variable rate investment loans allow you to make extra repayments, access offset or redraw facilities, and switch lenders without break costs. Fixed rate loans lock in your repayment amount for a set term, usually one to five years, but limit flexibility and can incur significant break costs if you repay or refinance early.

Some investors split their investment loan between variable and fixed portions to balance certainty with flexibility. The fixed portion provides predictable repayments, while the variable portion allows extra repayments if rental income exceeds expectations or you want to reduce debt faster. Rate discounts on investment loans are generally smaller than those available for owner-occupied lending, and the gap between the two has widened over the past 18 months as lenders respond to regulatory settings.

Building Wealth Through Property Without Selling Your Home

Using equity to buy an investment property allows you to enter the property market a second time without selling your home or waiting to accumulate a full deposit in cash. Both properties can appreciate over time, and the investment property generates rental income that covers some or all of the holding costs. If structured correctly, the tax treatment of interest and other expenses can reduce the after-tax cost of holding the property, though this depends on your marginal tax rate and the new rules that take effect from mid-2027.

Equity release creates leverage, which amplifies both gains and risks. If property values rise, your equity grows across both properties. If values fall or rental income drops, you're servicing a larger debt with less buffer. The strategy works when your income is stable, your existing mortgage is manageable, and you've planned for periods when the investment property may sit vacant or require unexpected repairs.

Call one of our team or book an appointment at a time that works for you to discuss how your current equity, income and goals align with the lending criteria and regulatory settings in place today.

Frequently Asked Questions