Leveraging Home Equity to Finance Investment Property

Using equity from your owner-occupied home to invest in property is a popular strategy among Australian investors. It allows you to leverage existing assets, build wealth through property, and take advantage of tax benefits—all while entering the market faster than by saving alone.

Investing in real estate has long been heralded as one of the most reliable wealth‑building strategies. One of the most powerful yet underutilized strategies for real estate investors—especially those just starting out—is tapping into the equity of a homeowner’s primary residence in order to finance an investment property. This financing approach can help borrowers bypass the challenges of saving large down payments, accessing funding quickly, and diversifying beyond stock or retirement accounts.

Let’s walk through the step‑by‑step process and explore the key advantages this strategy offers.

1. What is Home Equity?

Home equity is the difference between your property’s current market value and the outstanding balance on your home loan.

Example: If your home is worth $900,000 and your mortgage is $400,000, you have $500,000 in equity.

However, lenders generally won’t let you borrow against the full amount. Most will allow you to access up to 80% of your property’s value (sometimes more with Lenders Mortgage Insurance).

Using the same example:

• 80% of $900,000 = $720,000

• Less $400,000 owing = $320,000 usable equity

  
  

2. Ways to Access Home Equity to purchase Investment Property

There are three main methods Australian borrowers use to access equity:

a) Top-Up on Existing Home Loan

You increase the limit of your current home loan, with the additional funds released as cash. This is often the simplest and cheapest method, especially if your current loan has a competitive rate.

b) Split Loan Facility

You split your home loan into separate accounts: one for your original mortgage and one for investment purposes. This makes it easier to track investment interest (which may be tax-deductible).

c) Equity Loan or Separate Investment Loan

You apply for a separate loan using your home’s equity as security. This can be beneficial for structuring loans correctly for tax and cash flow purposes.

3. The Step-by-Step Process

Step 1: Assess Your Equity

• Request a property valuation through your lender or a mortgage broker.

• Calculate your usable equity (usually up to 80% of the value, less what you owe).

  
  

Step 2: Speak with a Mortgage Broker or Lender

• Review your current home loan.

• Discuss your investment goals and borrowing capacity.

• Choose the most suitable equity access method.

  
  

Step 3: Apply for Finance

• Submit documents: income details, expenses, liabilities, and property information.

• Your lender will conduct serviceability and credit assessments.

• Once approved, funds will be available to use as a deposit for the investment property.

  
  

Step 4: Purchase Investment Property

• Use the released equity as the deposit.

• Apply for an investment loan for the remainder (e.g., 80% of purchase price).

• This creates a geared investment structure: your home secures the deposit, and the new property secures the rest.

  
  

Step 5: Maintain and Monitor

• Track repayments on both loans.

• Record interest separately for tax purposes.

• Consider using an offset account for flexibility and tax efficiency.

  
  

4. Key Benefits of Using Equity to Invest

a) No Need for Large Cash Savings

Using equity can eliminate the need to save a deposit from scratch, allowing you to enter the market sooner.

b) Access to Competitive Loan Rates

Loans secured by property typically attract lower interest rates than unsecured loans.

c) Tax Deductibility of Interest

Interest on the portion of the loan used to purchase the investment property may be tax-deductible. Keeping investment debt separate makes this easier to track.

d) Potential for Capital Growth

You can benefit from capital growth on both properties, increasing your overall net worth.

e) Rental Income

An investment property can generate rental income, helping to cover loan repayments and expenses.

f) Leverage

Using equity means you're investing with borrowed money, which can amplify returns (and losses).

5. Key Risks and Considerations

a) Market Fluctuations

If property values fall, your equity can shrink, and you may owe more than your home is worth.

b) Increased Debt and Repayments

Tapping into equity increases your total borrowings. Ensure you can manage repayments, even if interest rates rise or rental income dips.

c) Tax Complexity

Blending personal and investment loans can complicate tax deductions. Always seek advice from a qualified tax professional.

d) Risk to Your Home

Because your home is used as security, defaulting on repayments could put your residence at risk.

6. Case Study

John and Emily own a home in Melbourne worth $1.2 million, with $500,000 remaining on their mortgage. They want to invest in a $700,000 rental property.

• Usable equity: (80% of $1.2M = $960,000) - $500,000 = $460,000

• They use $140,000 as a 20% deposit + stamp duty and fees.

• They obtain a new investment loan for the remaining $560,000 secured by the investment property.

• The equity release is set up as a separate split loan to keep interest deductible and separate from their home loan.

• Rental income helps cover the new loan repayments, and they benefit from depreciation and negative gearing tax benefits.

  
  

7. Tips for Success

• Use a Mortgage Broker like Etairos Finance to compare lender policies and structure loans effectively.

• Maintain Loan Separation for tax clarity.

• Stress Test Your Budget with higher rates or vacancy periods.

• Review Regularly to ensure your structure remains competitive.

• Seek Professional Advice from a licensed accountant and financial adviser.

  
  

Conclusion

Using equity from your owner-occupied home to invest in property is a popular strategy among Australian investors. It allows you to leverage existing assets, build wealth through property, and take advantage of tax benefits—all while entering the market faster than by saving alone.

However, the strategy comes with added responsibilities, financial risk, and tax considerations. It is essential to plan carefully, get expert advice, and ensure the structure aligns with your long-term financial goals.

With the right guidance, equity can be more than just untapped value—it can be the key to growing your investment portfolio and achieving financial freedom.