How to Use Home Equity to Buy an Investment Property in Australia: A Step-by-Step Guide for 2025
Using the equity in your current home to purchase an investment property is a proven wealth‑building strategy in Australia. With property values rising across many capital cities, more homeowners are tapping into their equity to expand their portfolios without needing a large cash deposit. This guide walks you through the process, loan structures, risks, and tax considerations—all based on 2025 market conditions and regulatory requirements.
What Is Home Equity and How Does It Work?
Home equity is the difference between your property’s current market value and the outstanding balance on your mortgage. For example, if your home is worth $900,000 and you owe $400,000, your equity is $500,000. Lenders allow you to borrow against a portion of this equity—typically up to 80% of the property value minus the existing loan, known as “useable equity.”
Useable Equity Calculation
| Property Value | Outstanding Loan | Total Equity | Maximum Borrowing (80% LVR) | Useable Equity |
|---|---|---|---|---|
| $900,000 | $400,000 | $500,000 | $720,000 | $320,000 |
| $1,200,000 | $600,000 | $600,000 | $960,000 | $360,000 |
| $750,000 | $500,000 | $250,000 | $600,000 | $100,000 |
Note: Lenders mortgage insurance (LMI) may apply if borrowing above 80% LVR, but most equity releases are capped at 80% without LMI.
Step 1: Assess Your Financial Position and Equity
Before approaching a lender, you need a clear picture of your finances. Start by obtaining a professional valuation of your home—either through a bank valuation or a licensed appraiser. Lenders will use their own valuation, but an independent estimate helps you plan.
Key Numbers to Calculate
- Current home value: Use recent comparable sales or a kerbside valuation.
- Outstanding loan balance: Check your latest mortgage statement.
- Usable equity: (Home value × 0.8) – loan balance.
- Borrowing capacity: Lenders assess your income, expenses, existing debts, and the anticipated rental income from the investment property. As of 2025, most lenders apply a 3% serviceability buffer above the loan interest rate, as mandated by APRA.
According to the Australian Bureau of Statistics (ABS), the average loan size for investment properties reached $650,000 in early 2025, reflecting strong market demand. Ensure your income can support additional debt, factoring in potential interest rate rises.
Step 2: Understand Loan Structures for Equity Release
There are two primary ways to access equity:
1. Loan Top‑Up or Increase
You ask your current lender to increase your existing home loan by the amount of useable equity. The extra funds are deposited into your offset account or a separate loan split. This is simple but ties the investment to your home loan, reducing tax efficiency (see Step 6).
2. Separate Loan Split or New Loan Account
A more tax‑effective method is to create a separate loan split against your home equity. The funds are drawn as a distinct loan account used solely for the investment property deposit and costs. This keeps the interest deductible for tax purposes.
3. Cross‑Collateralisation vs. Stand‑Alone Security
- Cross‑collateralisation: The lender uses both your existing home and the new investment property as security for one large loan. It can help borrow more but reduces flexibility if you want to sell one property later.
- Stand‑alone security: You borrow against your home equity for the deposit, then take out a separate investment loan secured only by the new property. This is generally preferred for asset protection and tax clarity.
2025 Trend: Many brokers now recommend a stand‑alone structure to avoid cross‑collateralisation complications, even if it means a slightly higher interest rate on the investment loan.
Step 3: Calculate Costs and Budget for the Investment Purchase
Buying an investment property involves more than just the purchase price. You’ll need to cover:
| Cost Category | Estimated Amount (2025) |
|---|---|
| Stamp duty (varies by state) | $30,000 – $55,000 on a $700,000 property |
| Legal and conveyancing fees | $1,500 – $3,000 |
| Building and pest inspection | $500 – $800 |
| Loan application and valuation fees | $0 – $1,000 (many lenders waive these) |
| Lenders mortgage insurance (if applicable) | $8,000 – $15,000 |
| Ongoing costs (rates, insurance, management) | $5,000 – $10,000 p.a. |
Stamp duty exemptions or concessions may apply in some states for off‑the‑plan purchases or first‑time investors, but most equity borrowers are not first‑time buyers.
Your equity release should cover the deposit (typically 20% to avoid LMI on the investment loan) plus these upfront costs. Many investors aim for a 20% deposit on the new property, borrowing the remaining 80% through a separate investment loan.
Step 4: Apply for an Equity Release or Refinance
Once you’ve chosen a structure, you can approach your current lender or a mortgage broker. The process:
- Valuation: The lender orders a valuation of your existing home (and sometimes the investment property if already identified).
- Serviceability assessment: Provide payslips, tax returns, and details of all debts and assets. Lenders will factor in 70–80% of the expected rental income.
- Approval and documentation: If approved, you’ll sign new loan documents. A separate loan split will be created, and funds are usually available within a few weeks.
Pro tip: In 2025, many lenders offer cashback incentives (e.g., $2,000–$4,000) for refinancing, which can offset some costs. However, always compare the long‑term interest rate rather than chasing short‑term perks.
Step 5: Find and Purchase the Right Investment Property
With your equity funds ready, you can search for a property that aligns with your investment goals—capital growth, rental yield, or a balance of both. Consider:
- Location: Proximity to transport, schools, and employment hubs.
- Rental demand: Vacancy rates below 3% are favourable.
- Property type: Houses often yield lower rent but higher capital growth; units may offer better cash flow.
Use a buyer’s agent if you’re unfamiliar with the area. Once you’ve found a property, the purchase process mirrors any standard transaction, but you’ll need to coordinate settlement with your equity release and the new investment loan.
Step 6: Optimise Tax Deductions and Structure
Tax efficiency is critical when using equity to invest. The interest on the portion of the loan used for income‑producing purposes is tax‑deductible. However, if you mix personal and investment borrowings, you risk losing deductibility.
Key Tax Rules (2025 ATO Guidelines)
- Loan purpose determines deductibility: Only interest on funds drawn for the investment property (deposit, stamp duty, costs) is deductible. Redraw for personal use contaminates the loan.
- Separate loan split is essential: A distinct loan account makes it easy to trace the borrowed funds to the investment.
- Negative gearing: If rental income is less than expenses (including interest), you can offset the loss against your other income, reducing your taxable income.
- Depreciation: Claim depreciation on the building and fixtures (use a quantity surveyor’s tax depreciation schedule).
Example: You release $200,000 equity via a separate loan split and use it entirely for a $150,000 deposit and $50,000 in costs. All interest on that $200,000 split is deductible. If you redrew $10,000 for a holiday, the ATO would apportion the interest, complicating your claim.
Consult a tax accountant before finalising the loan structure to avoid costly mistakes.
Step 7: Manage Risks and Build a Buffer
Leveraging equity magnifies both gains and losses. Property prices can fall, interest rates can rise, and vacancies can erode cash flow. Mitigate risks with these strategies:
- Maintain an offset account: Park spare cash in an offset linked to your non‑deductible home loan to reduce interest while keeping funds accessible.
- Fixed vs. variable rates: Consider fixing part of your investment loan to protect against rate hikes. In mid‑2025, three‑year fixed rates hover around 5.8–6.2%, while variable rates average 6.5%.
- Landlord insurance: Covers loss of rent, tenant damage, and legal liability.
- Interest‑only periods: Many investors opt for interest‑only repayments on the investment loan for the first 5 years to improve cash flow, but this delays principal reduction.
According to the Reserve Bank of Australia (RBA), around 35% of investment loans are on interest‑only terms as of March 2025, down from 40% in 2023, reflecting tighter lending standards.
FAQ
Can I use equity as a deposit without selling my home?
Yes. You can borrow against your home equity to fund the deposit and costs for an investment property. This is commonly done through a loan top‑up or a separate loan split, and you retain ownership of your existing home.
How much equity do I need to buy an investment property?
Ideally, enough usable equity to cover a 20% deposit plus stamp duty and fees—typically $150,000–$250,000 depending on the property price. If you have less, you may still proceed but will likely pay LMI on the investment loan.
Is equity release taxable?
No. Equity release is a loan, not income, so the funds you receive are not taxable. However, the interest you pay on that loan may be tax‑deductible if used for investment purposes.
What are the risks of using equity to invest?
The main risks include: falling property values that reduce your equity buffer, rising interest rates that strain cash flow, rental vacancies, and cross‑collateralisation that ties your home to the investment property. Proper structuring and a financial buffer can mitigate these risks.
Can I use equity from an investment property to buy another?
Yes, the same principles apply. You can release equity from an existing investment property to fund the next purchase, but be mindful of the overall debt level and serviceability.
References
- Australian Taxation Office (2025). Rental properties – claiming interest. https://www.ato.gov.au/individuals-and-families/investments-and-assets/residential-rental-property/rental-property-expenses/interest-expenses
- Australian Prudential Regulation Authority (2025). APRA maintains macroprudential settings. https://www.apra.gov.au/news-and-publications/apra-maintains-macroprudential-settings
- Reserve Bank of Australia (2025). Chart Pack – Household Sector. https://www.rba.gov.au/chart-pack/household-sector.html
- Australian Bureau of Statistics (2025). Lending Indicators, March 2025. https://www.abs.gov.au/statistics/economy/finance/lending-indicators/latest-release
- MoneySmart (2025). Using home equity. https://moneysmart.gov.au/home-loans/using-home-equity