Unlock the secrets to using home equity for investment

If you own property in Vaucluse and have been paying down your mortgage for a few years, you likely have equity sitting in that home that can be used to fund your next purchase.

Equity is the difference between what your property is worth and what you owe on it. When you borrow against that equity to buy an investment property, you are using one asset to build another without needing to save a separate deposit from scratch. The home you live in stays yours. The debt increases, but so does your property portfolio.

How much equity can you actually use?

Most lenders will let you borrow up to 80 per cent of your property's value without needing to pay Lenders Mortgage Insurance. If your home is valued at $4 million and you owe $1.5 million, your usable equity is $1.7 million. That figure comes from taking 80 per cent of $4 million, which is $3.2 million, and subtracting the $1.5 million you still owe.

If you want to borrow more than 80 per cent, LMI becomes part of the equation. The premium adds to your upfront costs and can run into tens of thousands depending on the loan size and how far above 80 per cent you go. Some lenders offer products that avoid LMI at higher ratios under specific conditions, and these can be worth comparing if your equity sits just below the threshold you need.

Setting up the loan structure

When you borrow against equity to buy an investment property, the new lending is typically structured as a separate loan or split, even though it may be secured against your existing home. Keeping the investment loan separate from your owner-occupied borrowing makes it easier to track deductible interest and manage repayments.

Interest on the portion of your borrowing used to buy or hold the rental property is tax deductible. Interest on the portion used for private purposes is not. If you mix the two, separating them later becomes difficult. Setting up a clean loan split from the start avoids that problem.

Many investors choose interest-only repayments on the investment portion to keep monthly costs down and maximise the tax deduction, while continuing to pay down the loan on their own home. That approach improves cash flow but means the investment debt does not reduce unless you make additional payments.

What the new negative gearing rules mean for you

From 1 July 2027, rental losses on residential investment properties purchased after 12 May 2026 can no longer be offset against your salary or other non-rental income. Those losses are quarantined and can only be used against future rental income or capital gains from residential property.

If you exchange contracts on an investment property before that date, the existing negative gearing rules continue to apply for as long as you own it. If you buy an eligible new build after that date, you can still claim rental losses against other income in the same way as under the old rules.

This does not stop you from using equity to buy property. It changes the tax treatment of any shortfall between rental income and holding costs. For properties in Vaucluse and surrounding areas where yields tend to be lower and capital growth has historically been stronger, the shift means you will need to fund any rental shortfall from after-tax income rather than reducing your taxable income.

Consider an investor who uses $800,000 in equity to buy a two-bedroom apartment as a rental. Under the old rules, if holding costs exceeded rent by $15,000 a year, that loss could reduce taxable income and generate a tax refund. Under the new rules for properties bought after the cut-off, the $15,000 loss is carried forward and used when the property is sold or when rental income exceeds expenses. The investor still builds wealth through capital growth, but the annual tax benefit disappears.

Serviceability and the debt-to-income limit

Lenders assess your ability to service the new debt at a rate roughly 3 percentage points above the actual loan rate. They also apply a discount to rental income, usually between 20 and 30 per cent, to account for vacancy and maintenance.

From February this year, lenders have been required to limit the proportion of new loans they write at a debt-to-income ratio of six times or higher. For each lender, no more than 20 per cent of new investor loans can exceed that threshold. If your total debt across all properties is more than six times your gross income, you may find fewer lenders willing to approve your application, or you may need to adjust your borrowing amount.

Your borrowing capacity depends on your income, existing debts, living expenses and the rental income the new property will generate. Running the numbers before you start looking at properties gives you a realistic price range and avoids wasted time.

Costs beyond the deposit

When you buy an investment property using equity, you still need to budget for stamp duty, legal fees, building and pest inspections, and any lender establishment costs. In New South Wales, stamp duty on an established property can be significant, and foreign investors face additional surcharges if applicable.

If the equity you release does not cover the purchase price plus all associated costs, you will need to contribute additional funds or adjust your budget. Some buyers add these costs to the loan if their equity position allows it, but that increases the total debt and affects serviceability.

Body corporate fees, council rates, insurance, property management and ongoing maintenance are all part of holding an investment property. These costs are deductible when the property is rented or genuinely available for rent, but they still need to be paid regardless of whether the property is tenanted.

Why loan structure matters after settlement

Once the property settles, how you manage the loan affects both your tax position and your flexibility. Redraw facilities and offset accounts work differently for tax purposes. Money sitting in an offset account linked to your investment loan reduces the interest you pay without affecting the deductible loan balance. Money redrawn from the loan and used for private purposes creates a portion of non-deductible interest.

If you plan to use surplus cash flow to pay down debt faster, paying down your owner-occupied loan first usually makes more sense because that interest is not deductible. The investment loan can remain interest-only, preserving the deduction while you reduce the more expensive non-deductible debt.

Some investors split their lending across multiple lenders to access different investment loan products or rate discounts. Others consolidate everything with one lender for convenience. Neither approach is automatically right, but the decision should be made with a clear understanding of the rates, features and flexibility each lender offers.

Vaucluse property as security

Using a Vaucluse property as security gives you access to substantial equity. The suburb sits on the peninsula east of the city, bordered by the harbour, ocean beaches and parkland. Properties here tend to hold value through market cycles, and lenders generally view them as lower-risk security.

That security position can improve your borrowing terms, but it does not remove the need to demonstrate serviceability. Lenders still assess your income, existing commitments and ability to meet repayments under a higher interest rate scenario. The value of your home supports the loan size, but your income determines whether the loan is approved.

If the investment property you buy is in a different area with different market characteristics, the lender will assess both properties independently. They will consider the quality of the tenancy, the location, and the likelihood of sustained rental demand when calculating how much rental income to include in your serviceability assessment.

Call one of our team or book an appointment at a time that works for you. We work with property investors across the eastern suburbs and can help you structure your lending, compare your options and move forward with confidence.

Frequently Asked Questions