Using Home Equity to Buy Your Next Investment Property

Can You Use Home Equity to Buy an Investment Property?

Yes, you can use the equity in your existing home to purchase an investment property without needing to save another deposit. Lenders typically allow you to borrow up to 80% of your property's value, with the difference between what you owe and what you can borrow becoming accessible funds for your next purchase.

The calculation works like this: if your home is worth $700,000 and you owe $300,000, you have $400,000 in equity. At 80% loan to value ratio, you could potentially borrow up to $560,000 against that property. After repaying your existing $300,000 loan, you'd have access to $260,000 for an investor deposit, stamp duty, and other purchase costs.

This approach has become particularly relevant across Queensland's property markets, where median house prices in areas like the Gold Coast and Sunshine Coast have climbed substantially over recent years. Homeowners who purchased several years ago often find they're sitting on equity they didn't realise could fund their next move.

How Equity Release Works for Property Investment

You access your equity through refinancing your current home loan. Your lender replaces your existing loan with a larger one, releasing the difference as usable funds. You don't receive this money as cash - it moves directly to your solicitor's trust account or goes toward the investment property purchase.

Consider someone who owns a Brisbane northside home valued at $650,000 with a remaining loan of $250,000. They want to buy a $500,000 investment property in Caboolture. Their lender agrees to refinance their home loan to $520,000 (80% of $650,000). After repaying the original $250,000 loan, they have $270,000 available. They use $100,000 for the 20% deposit on the Caboolture property, another $20,000 for stamp duty and purchase costs, and arrange a separate $400,000 investment loan for the remainder.

This structure means you end up with two separate loans: one secured against your home and another secured against the investment property. Keeping them separate matters for tax purposes, as only the interest on your investment property loan becomes a claimable expense.

Understanding Your Borrowing Capacity as an Investor

Lenders assess your borrowing capacity differently when you're buying an investment property compared to buying a home to live in. They calculate your ability to service both loans using rental income from the investment property, but they don't count 100% of that income.

Most lenders apply what's called a shading rate - they'll only count 70% to 80% of the expected rental income when determining if you can afford the repayments. If a property in Logan generates $450 per week in rent, the lender might only count $315 to $360 of that income in their calculations. They also factor in potential vacancy rates and ongoing costs like body corporate fees, insurance, and property management.

Your existing home loan repayments, living expenses, and any other debts all reduce how much you can borrow for the investment. In our experience, this is where many Queensland investors hit a ceiling - they have sufficient equity but their income doesn't support servicing both loans once the lender applies these conservative calculations.

Interest Only Investment Loans and Cash Flow

Most investors choose an interest only loan structure for their investment property, at least initially. You only pay the interest portion each month, keeping your regular repayments lower than a principal and interest loan would require.

On a $400,000 investment loan at current variable rates, an interest only repayment might sit around $1,800 to $2,000 per month, compared to $2,400 to $2,600 for principal and interest. That difference matters when you're managing cash flow across multiple properties, especially during periods when the property sits vacant between tenants.

Interest only periods typically last between one and five years before converting to principal and interest. This structure works well when your property investment strategy focuses on capital growth rather than immediate loan reduction. You maximise tax deductions in the early years while keeping more cash available for portfolio growth or other investments.

The tradeoff is that you're not reducing the loan amount during the interest only period, and your repayments will increase once the loan converts to principal and interest. Some investors refinance at that point to access additional equity or restructure their loans as their portfolio expands.

Loan to Value Ratio and Lenders Mortgage Insurance

When you leverage equity to buy an investment property, staying at or below 80% loan to value ratio across your lending means you avoid Lenders Mortgage Insurance on both properties. Once you exceed 80%, LMI applies and can add thousands to your upfront costs.

Some investors choose to borrow at higher ratios - up to 90% or occasionally 95% - to preserve cash or buy sooner. On a $500,000 investment property, the difference between an 80% loan ($400,000) and a 90% loan ($450,000) means finding $50,000 less in deposit and costs. LMI at 90% on that property might cost $15,000 to $18,000, capitalised into your loan amount.

You can claim LMI as a tax deduction for investment properties, either as a lump sum in the year you pay it or spread across five years. Your accountant will advise which approach suits your circumstances, but knowing it's deductible changes the calculation compared to paying LMI on your own home.

Tax Benefits and Negative Gearing Considerations

Interest on your investment loan, property management fees, council rates, insurance, repairs, and depreciation all become claimable expenses against your rental income. When your total expenses exceed your rental income, negative gearing benefits allow you to offset that loss against your other taxable income.

For someone earning $95,000 per year who owns an investment property generating $400 per week rent ($20,800 annually) with total expenses of $28,000, the $7,200 shortfall reduces their taxable income to $87,800. At that income level, the tax saving might be around $2,500, bringing their actual out-of-pocket cost down to $4,700 for the year.

Interest makes up the largest portion of your claimable expenses, which is why investors typically prefer variable rate or interest only structures that keep the loan balance high and interest deductions maximised. As you build wealth through capital growth, the tax benefits help make holding the property more manageable during the years you're waiting for values to increase.

When Your Home Loan Needs Reviewing

Before you can access equity, your current home loan needs to allow it. Some older loans carry restrictions, or you might be locked into a fixed rate with substantial break costs that make refinancing unviable right now.

A loan health check identifies whether your current loan structure supports accessing equity or if you're better off waiting. If you're on a fixed rate that expires within six months, it often makes sense to time your equity release with the expiry to avoid penalties.

We regularly see homeowners who've been with the same lender for years, unaware that their loan terms or interest rate no longer reflect what's available in the current market. Reviewing your position before you start looking at investment properties means you know exactly what you can access and whether refinancing delivers other benefits like rate discounts or better loan features.

If you're considering buying an investment property using equity from your Queensland home, call one of our team or book an appointment at a time that works for you. We'll review your current position, calculate what equity you can access, and structure your lending to support your property investment strategy while keeping your tax position clear.

Frequently Asked Questions