Every principal and interest repayment you make builds equity in your home. You can use that equity as the deposit on an investment property, without saving a new deposit from scratch.
What is equity?
Equity is the difference between what your home is worth now and what you still owe on it. If your home is valued at $800,000 and you owe $300,000, your equity is $500,000.
It builds in two ways. Capital growth, if the property rises in value. And principal and interest repayments, which reduce what you owe. Both work in your favour at the same time.
How much of it can you actually use?
Not all of it. Lenders generally cap borrowing at 80% of the property value, because lending above that exposes them if prices fall. Anything above 80% usually triggers lenders mortgage insurance.
So your usable equity is 80% of your home’s value, minus what you still owe:
- Current value: $800,000
- 80% of value: $640,000
- Less what you owe: $300,000
- Usable equity: $340,000
Your total equity was $500,000. Your usable equity is $340,000. That gap catches people out.
How do you access it?
Usually by refinancing. The lender orders a valuation, you refinance against the new value, and the released equity becomes your deposit.
How the loan is structured matters more than most people realise. Keeping the investment borrowing separate from your home loan, rather than rolling it into one, keeps the investment interest clearly identifiable. That matters at tax time, because interest on money borrowed to invest is generally deductible while interest on your own home is not. Mixing them makes the accounting messy. More on investment property tax.
Refinancing has costs of its own, including discharge fees and setup costs on the new loan. What refinancing costs.
How much can you borrow against it?
A rough rule of thumb is around four times your usable equity, since the equity has to cover the deposit plus stamp duty, legal fees and other purchase costs. On $340,000 of usable equity, that points to a property up to roughly $1,360,000.
Treat that as a ceiling, not a target. It is what the equity allows, not what your income will support. The lender still has to be satisfied you can service both loans, and they assess that with a buffer above the actual rate. More on borrowing power for investment.
What is the risk?
You are increasing the debt against your own home to buy something else. That is the part worth sitting with.
Your repayments on your home go up, and you now have a second mortgage as well. If rates rise, if the property sits vacant, or if your income changes, you are carrying both. In the worst case, falling behind puts your home at risk, not just the investment.
Rental income is not guaranteed either. Vacancy periods happen, and so do repairs you did not budget for. A buffer that covers several months of both loans with no rent coming in is the difference between a bad quarter and a forced sale.
Does it suit what you are trying to do?
Worth being clear on the goal before you start. Long-term capital growth, immediate rental cash flow, and building a portfolio over time point to different properties and different loan structures.
If you are closer to retirement the question changes again: how the property produces income once you stop working, and what selling it would trigger in tax. Those answers affect what is worth buying now.
Common questions
How much equity do I need to buy an investment property?
Enough usable equity to cover the deposit plus purchase costs like stamp duty and legal fees. Usable equity is 80% of your home value minus what you still owe, so a home worth $800,000 with $300,000 owing gives you $340,000 to work with.
Can I use equity without refinancing?
Some lenders offer a separate equity loan or a line of credit secured against your home, which avoids restructuring your existing mortgage. Refinancing is the more common route, and which works out cheaper depends on your current rate and the fees involved.
Do I pay LMI when using equity?
Only if the borrowing takes you above 80% of your home value. Staying at or under 80% avoids it. Going above can still make sense if it gets you into the market sooner, but the premium is a real cost to factor in.
Should the investment loan be separate from my home loan?
Generally yes. Keeping them separate makes the investment interest clearly identifiable, which matters because interest on investment borrowing is usually tax deductible and interest on your own home is not. Mixing them complicates your tax position.