How do I use equity to buy an investment property?

Using the equity in your home to buy an investment property is one of the most common ways people build a portfolio, and one of the most misunderstood. The idea is simple, the detail matters. Here is how it actually works, and what to be careful about.

What equity is

Equity is the difference between what your home is worth and what you still owe on it. As you pay down your loan and as the property value grows, your equity grows. It is real value, but it is not cash until you borrow against it or sell, which is where using it to invest comes in.

Usable equity is less than total equity

You cannot usually access all of your equity. Lenders generally let you borrow up to around 80 per cent of your home value, so usable equity is roughly 80 per cent of the value less what you still owe. Borrowing above 80 per cent is sometimes possible but generally brings in Lenders Mortgage Insurance, so most equity strategies work within the 80 per cent line.

How it replaces a cash deposit

Instead of saving a separate cash deposit for the investment property, you use your usable equity as the deposit and costs. In practice the lender increases or restructures your borrowing so the equity funds the deposit on the new property. This is why people can buy a second property without saving a fresh deposit from scratch.

You still have to service the debt

Having equity is not enough on its own. The lender still assesses whether you can service the total debt across both your home loan and the investment loan, stress tested above the actual rate. Rent from the investment can help your serviceability, often shaded by the lender, but the debt has to stack up on your overall position.

The structure matters

How the loans are structured matters, both for flexibility and for tax. Keeping the investment borrowing separate from your home loan, rather than mixing them, is generally cleaner. The right structure depends on your goals and your tax position, which is why this is worth planning rather than doing on the fly.

Tax is for your accountant

There are tax consequences to borrowing to invest, including how interest is treated, and these depend on your personal circumstances. This is not tax advice, and the right structure for tax purposes should be confirmed with your accountant or tax adviser before you act, because getting the structure wrong can be costly to unwind.

The risks to weigh

Using equity increases your total borrowing and ties two properties together, so it raises both your potential and your risk. If values fall or rates rise, you are more exposed than with one property. It can be a powerful strategy, but it is not without risk, so it should suit your circumstances and tolerance.

Plan it properly

Because equity, serviceability, structure and tax all interact, this is worth planning carefully rather than rushing. A broker can work out your usable equity, whether you can service the total debt, and how to structure the loans, usually at no cost to you, while your accountant handles the tax side.