If you own a home in Australia, there's a good chance you're sitting on equity that could be used to purchase investment properties — without waiting years to save another deposit.
The investors who build serious portfolios aren't necessarily the ones with the highest incomes. They're the ones who understand how to use equity properly.
What Is Equity?
Equity is the difference between what your property is worth and what you owe on it.
| Current property value | $800,000 |
| Mortgage owing | $400,000 |
| Your equity | $400,000 |
What Is Usable Equity?
Usable equity is the portion you can actually access. Most banks will only lend up to 80% of your property's value.
| Property value | $800,000 |
| 80% of value | $640,000 |
| Less mortgage owing | $400,000 |
| Usable equity | $240,000 |
Important: This $240,000 isn't cash in your account. You need to apply for it like any other loan — the bank will assess your income, expenses, and credit history.
How Equity Funds Your Next Property
To buy an $800,000 investment property, you typically need:
| Cost | Amount |
|---|---|
| 20% deposit (to avoid LMI) | $160,000 |
| Stamp duty & fees | ~$40,000 |
| Total required | ~$200,000 |
With $240,000 in usable equity, you could fund this purchase and still have $40,000 accessible for future use.
Saving vs Using Equity: The Timeline
| Approach | Monthly Savings | Time to $200K |
|---|---|---|
| Saving $2,000/month | $2,000 | ~8 years |
| Saving $3,000/month | $3,000 | ~6 years |
| Using equity | — | Now |
The challenge with waiting: property prices are growing at over 6% annually. An $800,000 property today could be worth ~$1,100,000 in six years.
The Compounding Effect
When you own two properties instead of one, both are growing in value simultaneously.
Using the example above — if you purchase your second property now using equity, by year 3 you could have enough usable equity again to purchase a third property. This compounds over time, potentially allowing you to hold four to five properties within 7–8 years.
How to Access Your Equity
You have two options:
1. Stay with your current lender
Simpler process, but may not get the best outcome.
2. Shop around
Different banks use different valuation methods. One bank might value a property at $800,000 while another values it at $850,000. That extra $50,000 in valuation means an extra $40,000 in accessible equity.
How to Structure Your Loans
This is critical for both flexibility and tax purposes.
Don't do this:
Simply top up your existing home loan. Your home loan is non-deductible, but borrowing for an investment property is tax-deductible. If you mix them together, you create a mess at tax time.
Do this instead:
Ask for a loan split.
| Loan | Amount | Purpose | Tax Deductible? |
|---|---|---|---|
| Loan 1 | $400,000 | Original home loan | No |
| Loan 2 | $200,000 | Equity for investment | Yes |
Both loans are secured against your home, but tracked separately with their own statements. Your accountant can clearly see which interest is claimable.
Avoid Cross-Collateralisation
This is when the bank bundles all your properties together as security for all your loans. It's convenient for them, not for you.
The problem:
If you want to sell one property, the bank may block it until they're satisfied the remaining property covers all remaining debt. This limits your control.
Always insist on separate loans for separate properties.
Cash Flow Reality Check
Before using equity to invest, understand the real costs.
| Monthly Costs | Amount |
|---|---|
| Loan repayments ($640K at 6%) | ~$4,900 |
| Rates, insurance, property management | ~$500 |
| Total costs | ~$5,400 |
| Rental income | ~$3,000 |
| Out of pocket (before tax) | ~$2,400 |
Now factor in tax benefits:
| Tax Benefit | Amount |
|---|---|
| Interest (~$48K/year) at 37% bracket | ~$1,500/month |
| Real cost after tax | ~$900–$1,000/month |
That's roughly $230/week out of pocket.
Questions to ask yourself:
- Can I comfortably afford $1,000/month?
- What if the property is vacant for a month?
- What if interest rates rise another 1%?
If you can handle this with a buffer for unexpected costs, it's manageable. If not, it may be worth waiting.
Who This Strategy Suits
This is a 10–15 year wealth-building approach. It works best if you have:
- Stable, predictable income
- Financial discipline
- Patience to ride out market cycles
- Comfort with holding debt long-term
If you're already stretched on your current mortgage or uncertain about future income, this strategy may not be right for you yet.
Next Steps
Every property owner's situation is different — your income, existing debt, property values, and goals all factor into the right approach.
If you're interested in exploring how equity could work for your situation, the next step is getting a proper assessment of your numbers.
Disclaimer
This article provides general information only. Property values, lending criteria, and tax laws can change. Speak with a licensed mortgage broker, financial adviser, and accountant before making investment decisions.
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