Smart ways to use home equity for investment property

Using equity in your current home to fund the deposit on an investment property allows you to build a second income stream without needing to save another deposit from scratch.

Property owners in Truganina who have built equity through mortgage repayments and capital growth can access that value to fund a second property purchase. The process involves your lender revaluing your existing property, calculating the available equity, and structuring a new loan against that security. The equity acts as your deposit, which means you can move forward without liquidating other assets or waiting years to accumulate cash savings.

How equity release works for property investors

Equity is the difference between what your property is worth and what you owe on it. Lenders typically allow you to borrow up to 80 per cent of your property's value without requiring Lenders Mortgage Insurance, which means your accessible equity sits at 80 per cent of the property value minus your current loan balance.

Consider a property owner in Truganina whose home has been revalued and who currently owes $420,000 on the mortgage. If the lender permits borrowing up to 80 per cent of the property's value, the maximum loan amount against that security would be calculated by multiplying the valuation by 0.8. Subtracting the existing loan balance from that figure gives the usable equity. That amount can then be applied as a deposit on a second property, covering the upfront payment and associated costs such as stamp duty and conveyancing fees.

Structuring the loan across two securities

When you borrow against equity to purchase an investment property, the debt is typically split across two securities. Your existing home continues to secure the original loan plus the additional amount borrowed for the deposit. The new investment property secures its own acquisition loan. This structure keeps the purpose of each loan clear, which matters for tax deductions and for future refinancing or sale.

Interest on the portion of debt used to acquire or hold the investment property is deductible against rental income and other assessable income, provided the property is rented or genuinely available for rent. Interest on debt used for private purposes, such as renovations to your own home, remains non-deductible regardless of the security provided. Lenders and accountants both rely on loan purpose documentation when determining deductibility, so the way your facility is structured at the outset has lasting implications.

Borrowing capacity under current serviceability rules

Lenders assess your ability to service both your existing home loan and the new investment loan simultaneously. Under the prudential framework that applies to authorised deposit-taking institutions, your capacity is tested at an interest rate at least 3.0 percentage points above the actual loan product rate. Rental income from the investment property is included in the assessment, though lenders typically apply a shading factor to account for periods of vacancy or non-payment.

Debt-to-income limits also apply. From February of last year, lenders have been restricted to lending no more than 20 per cent of new investor loans to borrowers with a total debt-to-income ratio of six times or greater. If your combined home and investment loan borrowings exceed six times your gross annual income, you may fall outside the portion of the lender's appetite available for high-ratio lending. In our experience, clients who apply with rental income already secured through a lease agreement and who maintain a debt-to-income ratio below that threshold generally move through assessment without difficulty.

Interest-only repayments and cash flow planning

Many property investors choose interest-only repayment structures for investment loans to minimise monthly outgoings and preserve cash flow. Interest-only periods are typically available for up to five years, after which the loan reverts to principal and interest unless renegotiated. The benefit is that rental income can more readily cover the loan cost, and surplus cash flow can be directed toward offset accounts, further property acquisition, or principal reduction on the owner-occupied loan.

Interest-only investment loans generally attract higher risk weightings under the prudential standard that governs bank capital, which can flow through to pricing. The loan-to-value ratio also affects the rate. Borrowers who keep their combined loan-to-value ratio at or below 80 per cent across both properties avoid Lenders Mortgage Insurance and typically receive more favourable pricing than those borrowing at higher ratios.

Tax treatment for properties acquired after May last year

Investors acquiring established residential property after 7:30pm Australian Eastern Standard Time on 12 May of last year are subject to revised negative gearing rules from the 2027-28 income year onward. Losses on those properties, including interest and other holding costs, can be deducted only against income from residential properties, not against salary or other income sources. Losses that exceed residential property income in a given year can be carried forward to offset residential property income in future years.

Properties held at 12 May last year, including those under contract awaiting settlement at that time, remain fully deductible against all income indefinitely. Eligible new builds acquired after that date also retain full negative gearing treatment. For Truganina buyers considering an established investment property in the current environment, the change means that cash flow planning must account for the inability to offset early-year losses against wage income from the 2027-28 financial year onward. Rental income, capital gains from other residential property sales, and carried-forward losses become the only avenues for claiming those deductions.

Capital gains tax changes from July next year

From 1 July next year, capital gains on residential investment properties will be taxed under a revised framework. Gains accruing before that date continue to receive the 50 per cent discount for assets held longer than 12 months. Gains accruing from 1 July next year onward are subject to cost base indexation using the Consumer Price Index and a 30 per cent minimum tax rate on real gains.

For a property purchased now and sold in future years, the gain will be apportioned between the period before 1 July next year and the period after. Investors can either obtain a market valuation as at 1 July next year or apply a formula published by the Australian Taxation Office to apportion the gain. Eligible new builds offer a choice at the time of disposal between the existing 50 per cent discount method and the new indexation method, allowing the investor to select whichever produces the lower tax liability.

Truganina as an investment location

Truganina sits within the growth corridor west of Melbourne's CBD, bordered by the Western Freeway and Forsyth Road. The suburb has seen residential expansion over the past decade, supported by proximity to employment hubs including the Tottenham to Brooklyn industrial precinct and the Laverton and Deer Park employment areas. The area attracts a high proportion of families due to the availability of newly built homes, local primary schools including Truganina South Primary School and Truganina College, and access to the Skeleton Waterholes Creek reserve network.

Rental demand in the western growth corridor is typically driven by affordability relative to inner and middle-ring suburbs, combined with improving transport links and established community infrastructure. Investors examining Truganina and surrounding suburbs should consider proximity to the Deer Park and Tarneit railway stations, future road upgrades, and the tenant profile most likely to lease in a suburb dominated by detached housing. Vacancy rates, median rent, and days on market are all available through property data providers and should inform your decision alongside the purchase price and projected holding costs.

Refinancing existing debt before acquiring the investment property

Some property owners choose to refinance their current home loan before proceeding with an equity release and investment purchase. Refinancing can unlock a lower rate, access a product with more suitable offset or redraw features, or consolidate debt to improve serviceability. Moving to a lender with more flexible equity release policies or a higher acceptable loan-to-value ratio can also increase the amount available for the deposit.

Refinancing does add time to the overall process. A full application, valuation, and settlement are required before the equity can be accessed for the investment purchase. In circumstances where a suitable property has been identified and timing is important, existing lender equity release without a refinance may be the more practical path. Each scenario depends on the current loan terms, the rate differential available in the market, and whether the existing lender will support the proposed structure.

Call one of our team or book an appointment at a time that works for you to discuss how equity in your Truganina property can be structured to support your next investment purchase.

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