Should You Use Home Equity to Renovate or Buy an Investment?

Using equity for renovations is usually best when your home is under‑improved for the area and lifestyle is your priority. Using equity to buy another property usually makes more sense when your current home already works, your cashflow is strong and you want long‑term wealth growth. The right decision comes from comparing risk, cashflow and tax outcomes for both options side‑by‑side.

In Australia, you generally release equity either by topping up your home loan, refinancing with cash‑out, or moving to a construction loan. Lenders will usually cap total lending at around 80% of your property value without lenders mortgage insurance (LMI), and they’ll apply a 3% serviceability buffer (APRA) to test repayments at a higher rate.

Usable equity is usually capped by an 80% loan-to-value ratio rather than your full equity.

Step 1: Work out how much equity you can safely use

How usable equity is calculated

Usable equity is not your full equity. A common rule is:

Usable equity ≈ 80% of your property value − your current loan balance.

This is consistent with how we approach equity across our investment content (see /insights/rose-bay-equity-investments-family-safety-buffers).

Example
Home value: $1,500,000
Current loan: $700,000
Target LVR: 80% → $1,500,000 × 80% = $1,200,000
Usable equity ≈ $1,200,000 − $700,000 = $500,000

You could borrow up to another $500,000 without paying LMI. The safer question is how much of that you can service comfortably after the APRA buffer and higher RBA cash rates.

One pool of equity, two very different uses

You’re essentially deciding how to allocate that $500,000 (in this example) between:

1. Improving your existing home via renovations or rebuild; or
2. Funding a deposit and costs for another property (often an investment).

We almost always recommend separate loan splits for each purpose to protect tax deductibility and flexibility, consistent with our investment playbook at /insights/using-equity-fund-next-investment-property-playbook.

Step 2: Renovate vs buy – side‑by‑side comparison

High‑level pros and cons

Worked cashflow example

Let’s reuse the earlier usable equity example and compare two scenarios with an extra $400,000 borrowed.

Assume:

• New borrowing: $400,000
• Interest rate: 6.5% p.a.
• Term: 30 years, P&I on home, IO on investment split

Scenario A – $400k renovation
Full $400,000 added to home loan at 6.5% P&I.

Approximate repayment: about $2,528 per month (using a standard 30‑year P&I formula).
There’s no rental income to offset this. All repayments are after‑tax.

Scenario B – $400k used as 20% deposit for $2m investment purchase

• $400,000 equity split (interest‑only)
• New $1.6m investment loan at 6.5% IO

Approximate repayments:

• Equity split (IO at 6.5%): ≈ $2,167 per month
• Investment loan (IO at 6.5%): ≈ $8,667 per month
• Total additional repayments: ≈ $10,834 per month

Indicative rent: say $1,600 per week = ~$6,933 per month.
Net cash shortfall (before tax): ≈ $3,900 per month.

Under current rules, much of this shortfall could be tax‑deductible via negative gearing. But with Budget 2026–27 reforms limiting negative gearing on many established properties from 1 July 2027, you should stress‑test on the basis of little or no negative gearing benefit (see /insights/worked-examples-after-tax-cashflow-investment-loans-before-after-reforms).