Using Home Equity to Buy an Investment Property

What is Equity and How Can You Use It?

Most homeowners are sitting on a goldmine without realizing it.

If your home has increased in value over the last few years, or if you’ve been paying down your mortgage, you likely have “lazy equity.” This is the difference between your property’s current market value and what you owe the bank.

For example, if your home is worth $750,000 and your loan balance is $400,000, you have $350,000 in raw equity.

Through our equity release service, we help clients use this equity as a deposit for an investment property, meaning you often don’t need to save a cash deposit.

How Much Equity Can You Actually Access?

While you might have $350,000 in total equity, the bank won’t let you use every cent.

Most lenders in Australia require you to keep a “safety buffer” of 20% equity in your home to avoid Lenders Mortgage Insurance (LMI). This means your usable equity is calculated based on 80% of your home’s value, not 100%.

Calculating Your “Usable” Equity

The Formula (80% LVR Rule): (Property Value × 80%) - Current Loan Balance = Usable Equity

Real-World Example:

• Home Value: $750,000
• Bank’s Limit (80%): $600,000
• Existing Mortgage: -$400,000
• Usable Equity: $200,000

You can pull this $200,000 out to cover the 20% deposit and stamp duty for your next purchase.

What Can This Equity Pay For?

• The 20% Deposit: Essential for avoiding LMI on the new purchase.
• Stamp Duty (Transfer Duty): In Queensland, this can be significant (e.g., around $17,000+ on a $500k property).
• Legal Fees: Conveyancing usually costs between $1,500 and $2,000.
• Buyer’s Agent Fees: If you use a professional to find the property.
• Renovations: Immediate cosmetic fixes to boost rental yield.

A Critical Warning on “Maxing Out”

We always advise clients to leave a personal buffer. Just because you can borrow the full $200,000 doesn’t mean you should. Keeping $20,000-$30,000 accessible in an offset account provides a safety net for unexpected repairs or vacancy periods.

How to Access Your Equity (The Right Way)

Structuring this loan correctly is the most important step.

You generally have three options, but from our experience, only one is truly ideal for investors.

Option 1: Loan “Top Up” (Variation)

You ask your current lender to increase your existing home loan limit.

• Pros: It’s fast and requires less paperwork.
• Cons: It blends your personal debt with investment debt. This creates a nightmare for your accountant at tax time because they have to figure out which portion of the interest is tax-deductible.

Option 2: Line of Credit

You set up a separate facility that works like a giant credit card secured by your house.

• Pros: You only pay interest on the specific amount you draw down.
• Cons: Interest rates on lines of credit are often 1-2% higher than standard home loans. Many banks have stopped offering these or made them very expensive.

Option 3: Separate Investment Split (Recommended)

We set up a separate loan account secured by your home, but purely for the investment deposit.

This method keeps your finances clean. You will have:

1. Loan A: Your original home mortgage (Non-deductible debt).
2. Loan B: The equity release for the deposit (Deductible investment debt).
3. Loan C: The remaining 80% loan for the new property (Deductible investment debt).

Why we prefer this: Your accountant will love you. You get a separate bank statement for “Loan B,” making it instantly clear that 100% of the interest on that account is tax-deductible.

The “Cross-Collateralisation” Trap

This is the single most common mistake we see investors make.

What is it? Cross-collateralisation happens when the bank uses both your home and your investment property as security for both loans. It links the two properties together like a three-legged race.

Why is it dangerous?

• You lose control of your sale proceeds: If you sell your investment property, the bank can force you to use the profit to pay down your home loan, even if you wanted to keep the cash.
• Refinancing is painful: To move one loan to a cheaper lender, you have to refinance everything and re-value all properties.
• The “All Monies” Clause: This clause in the fine print allows the bank to use equity from one property to cover debts on another without your direct permission.

Our Advice: Keep your properties “stand-alone” whenever possible. Your home secures your home loan; the investment secures the investment loan. This protects your family home from your investment risks.

The Numbers: Does It Stack Up in 2026?

With interest rates hovering between 6.0% and 6.5% for investment loans, the math has changed.

You need to ensure the rental income and tax benefits justify the cost. Let’s look at a realistic scenario for a property in a high-yield regional market like Gladstone.

Case Study: Buying a $500,000 Investment

The Costs

• Purchase Price: $500,000
• Total Loan: $525,000 (Purchase price + Stamp Duty + Costs, funded via equity & new loan)
• Interest Rate: 6.25% (Principal & Interest)

Annual Expenses

Expense	Estimated Cost
Loan Interest	$32,812
Property Mgmt (8%)	$2,080
Rates & Water	$3,500
Insurance	$1,200
Maintenance	$1,000
Total Expenses	$40,592

Annual Income

• Rent: $500/week ($26,000/year)
• Gross Yield: 5.2%
• Cash Flow Position: -$14,592 (Negative Geared)

The Tax Benefit (30% Bracket)

• Tax Deduction: You claim the $14,592 loss plus depreciation (around $6,000 non-cash deduction).
• Tax Refund: Approximately $6,177 back in your pocket.

Net Cost to Hold

• Weekly Cost: Around $161 per week.

You are effectively paying $161 a week to control a $500,000 asset. Ideally, the property’s value grows by more than $8,400 a year (just 1.7% growth) to break even on equity.

Risks You Must Consider

The “Interest-Only” Cliff

Many investors choose “Interest Only” loans for the first 5 years to improve cash flow. However, once that period ends, your repayments will jump significantly as you start paying back the principal. You need an exit strategy before that happens.

Vacancy Risk

In regional areas, vacancy rates can fluctuate. While Gladstone currently has tight vacancy (under 1%), this can change with industry cycles. Always budget for 2-4 weeks of vacancy per year.

Valuation Shortfalls

If the bank valuation comes in lower than the purchase price, you may need to top up the difference with cash. This is common in fast-moving markets where valuers can’t keep up with sale prices.

Is Using Equity Right for You?

You are a good candidate if:

• You have more than 20% equity in your home.
• You have a stable income that can service the new debt.
• You have a cash buffer of at least $10,000-$20,000.
• You are looking at a 10+ year horizon.

You should pause if:

• You are planning to change jobs or have a baby soon (income changes).
• You lose sleep over fluctuating interest rates.
• Your current mortgage stresses your budget.

How We Help With Equity Access

At AJ Home Loans, we specialize in structuring loans for long-term growth.

1. Valuation First: We order upfront valuations to see exactly how much equity you have before you apply.
2. Structure for Tax: We work directly with your accountant to ensure your loan splits are set up correctly for maximum deductibility.
3. Lender Selection: We know which banks are currently offering generous borrowing capacity for investors.
4. Stand-Alone Security: We fight to keep your loans separate, avoiding the cross-collateralisation trap.

Explore Your Equity Options

Are you sitting on “lazy equity”?

Book a free strategy session with our team. We’ll run the numbers, check your borrowing power, and show you exactly what you can afford without risking your family home.