Key takeaways
- Usable equity is typically up to 80% of your home's value, minus what you owe.
- Keep the investment borrowing in a separate loan split, so the interest is easy to track for tax.
- Avoid cross-collateralising your home and investment property where you can.
- Lenders assess whether you can service both loans, including a buffer on the new debt.
Thinking about switching? See how our free refinance review works.
How does using equity work?
Equity is the difference between your property's value and what you owe. Lenders generally let you borrow up to 80% of the value without LMI, so your usable equity is roughly 80% of the value minus your current balance. On a $700,000 home with $400,000 owing, that's about $160,000 of usable equity, subject to the lender's valuation and your ability to service the extra debt. See releasing your equity, wisely.
How should the loans be structured?
The cleanest setup is usually three separate pieces: your existing home loan, a new split against your home for the investment deposit and costs, and a loan against the investment property for the rest of the purchase. Keeping the investment borrowing separate makes it simple to show which interest relates to the investment. Your accountant can advise on deductibility.
Why avoid cross-collateralisation?
Cross-collateralisation means one lender holds both properties as security for the combined debt. It can seem simpler, but it gives the lender more control when you sell, refinance or want to release equity later. Separate securities, sometimes with separate lenders, keep your options open. See cross-collateralisation, and why to avoid it.
What do lenders assess?
- Your income, including a discounted portion of the expected rent.
- Your living expenses and all existing debts.
- Whether you can service both loans at a buffered assessment rate.
- The valuation of your home, which sets the equity available.
- The investment property itself, including its type and location.
Some lenders are more generous with rental income or treat existing debts differently, which can decide whether the purchase works.
Should the investment loan be interest-only?
Many investors use interest-only on the investment debt and pay down the home loan, which isn't deductible. It can improve cash flow, but repayments rise when the interest-only period ends and the balance doesn't fall. See interest-only loans, weighed honestly.
Budget for the full cost
Include stamp duty, conveyancing, inspections, lender fees and a buffer for vacancy and maintenance. In South Australia investors pay the same stamp duty rates as owner-occupiers. See the SA stamp duty calculator.
Plan your first investment
We'll work out your usable equity, check serviceability across lenders and set up the structure before you start looking.
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Frequently asked questions
How much equity do I need to buy an investment property?
Enough to cover the deposit and purchase costs, usually 20% plus costs to avoid LMI on the investment loan. Less is possible if you accept LMI.
Do I have to refinance to a new lender?
Not always. Your current lender may increase your loan. Refinancing can make sense if another lender offers better pricing or more borrowing capacity.
Is the interest tax deductible?
Interest on money borrowed to buy an income-producing property is generally deductible. Get advice from your accountant on your situation.
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This guide is general information only and does not take your personal circumstances into account. It is not financial, credit, tax or legal advice. Examples are illustrative only. Government schemes, lender policies and rates change over time and eligibility criteria apply. Speak with us for advice tailored to your situation. LendQuest Pty Ltd is a credit representative (555514) of BLSSA Pty Ltd, Australian Credit Licence 391237.