Step‑By‑Step: Using Home Equity To Buy Your Next Investment

Using existing equity to fund your next investment property means borrowing against the value of your current home or investments to cover the new deposit and costs instead of saving cash. Done well, you keep sensible loan‑to‑value ratios (LVRs), separate investment and home debt, and stress‑test repayments at higher interest rates before you sign a contract.

In this playbook, you’ll see exactly how to:

1. Work out your usable equity.
2. Turn that equity into a new loan split.
3. Structure the new investment purchase.
4. Avoid common tax and structure traps.
5. Build a one‑week action plan you can execute now.

1. Equity basics: what you’re actually using

Before you start talking deposits, you need a clear view of what equity you can safely touch.

1.1 Total equity vs usable equity

Total equity is simply:

Property value − Current loan balance

But lenders and sensible investors don’t let you use all of that. As explained in /insights/equity-strategies-property-investors, you usually work off usable equity, which builds in a safety margin.

A common guide is:

Usable equity ≈ (Property value × 80%) − Current loan balance

Staying at or below 80% total LVR typically avoids Lenders Mortgage Insurance (LMI) and gives you more flexibility in future.

Worked example

• Home value (bank valuation): $1,000,000
• Current home loan: $500,000
• Target LVR: 80%

Usable equity ≈ ($1,000,000 × 80%) − $500,000
= $800,000 − $500,000
= $300,000 usable equity

In simple terms, you could create a separate split of up to $300,000 for investment purposes and still sit around 80% LVR on the home.

1.2 Why 80% is the magic line (most of the time)

You can often borrow above 80%, but it usually means:

• Paying LMI or an LMI top‑up.
• Stricter lender assessment and APRA’s 3% buffer biting harder.
• Less room to move if values dip or rates rise.

Most investors using equity aim to:

• Keep their home at or below 80% LVR; and
• Accept higher LVRs (up to 90–95% with LMI) on the investment property if needed.

2. Step‑by‑step: using equity as your next deposit

Here’s the high‑level sequence before we drill into numbers and structures.

2.1 The end‑to‑end process

1. Confirm your property values (desktop or full valuation).
2. Calculate usable equity on each property.
3. Decide your target LVRs (home vs investments).
4. Refinance or top‑up to create a new, clearly labelled investment loan split.
5. Use that split as your deposit and costs for the new purchase.
6. Take a separate investment loan secured against the new property for the balance.
7. Set up offsets and buffers, then monitor cashflow.

This is the same logic whether you’re buying a house, unit or an off‑the‑plan apartment (for off‑the‑plan specifics, see /insights/using-equity-off-the-plan-deposit).

2.2 Turning the concept into a realistic budget

Let’s extend the earlier example.

• Home value: $1,000,000
• Current home loan: $500,000
• Usable equity at 80%: $300,000
• Target new investment purchase: $800,000
• Estimate purchase costs (stamp duty, legals, inspections, loan costs): say 5% ≈ $40,000 (varies by state).

You might structure it like this:

1. Equity loan split on home: $250,000

   • $160,000 for 20% deposit on $800,000 purchase.
   • $40,000 for costs.
   • $50,000 left as a buffer or for small renos.

2. New investment loan on the new property: $640,000 (80% of $800,000).

Your total borrowings now:

• Home loans: $500,000 (original) + $250,000 (equity split) = $750,000.
• Investment loan: $640,000.
• Combined property debt: $1,390,000.

Key question: can your cashflow genuinely handle this, using a higher test rate? We’ll come back to that.

3. Structuring the loans: splits, security and tax cleanliness

The way you structure the loans matters almost as much as how much you borrow.

3.1 Why separate loan splits are non‑negotiable

For clean tax and flexibility, you generally want:

• Existing home

  • Split A: Original home loan (owner‑occupied).
  • Split B: New investment purpose equity release.

• New investment property

  • Split C: Investment loan secured solely against the new property.

This reflects a key principle from our broader equity work: keep each investment purpose in its own clearly labelled split to simplify tax deductibility and refinancing later (see /insights/releasing-equity-from-your-home-safely).

3.2 Offsets vs redraw: don’t contaminate your tax position

If you release equity before you’re ready to settle on the new property, you’ll often park the funds temporarily.

Better practice is to:

• Use an offset account linked to the equity split to hold surplus cash.
• Avoid using redraw for mixed personal/investment spending.

Why? As our restructuring guides explain, using redraw on an investment loan for personal expenses can contaminate deductibility and create messy record‑keeping. Offsets leave the loan balance untouched while still reducing interest.

3.3 Principal & interest vs interest‑only

Most investors consider:

• Home loan: Principal & Interest (P&I), to steadily reduce non‑deductible debt.
• Investment splits: Sometimes Interest‑Only (IO) for 3–5 years, to maximise immediate cashflow and potentially deductible interest.

But IO isn’t a free lunch. Lenders will stress‑test your repayments as if they were P&I at a higher rate, and IO debt doesn’t reduce unless you actively park extra in offset.

Work with your broker and accountant to:

• Ensure the structure matches your overall strategy (e.g. debt recycling, retirement timing).
• Plan for the IO period ending and higher P&I repayments later.

3.4 Avoid cross‑collateralisation where possible

Whenever practical, aim for:

• Each property standing on its own security (or with clearly defined internal splits).
• Avoiding one giant loan covering multiple securities.

This usually makes it easier to:

• Sell or refinance one property without renegotiating the whole portfolio.
• Manage bank risk if one property underperforms or a lender tightens policy.