Common Mistakes When Using Equity to Buy Investment Property

Using Your Home Equity to Buy Another Property

Your home has built equity, and you're ready to turn that into a second property. The process involves borrowing against the value of your current home to fund the deposit and purchase costs for an investment property. Lenders will assess both properties when calculating how much you can access, and your existing home typically remains your security until the new loan settles.

Consider a migrant family in North Plympton who purchased their home four years ago for $580,000 with a 15 per cent deposit. The property is now valued at $680,000, and they owe $445,000 on the mortgage. That creates $235,000 in usable equity, though lenders will typically allow you to access up to 80 per cent of the property's value minus what you owe. In this scenario, the family could access around $99,000 without paying Lenders Mortgage Insurance, enough to cover a deposit and settlement costs on a property at the area's median or slightly below.

The application works differently than a standard home loan. Lenders assess your ability to service both the existing mortgage and the new investment loan at the same time, applying a serviceability buffer and factoring in a rental income estimate. Most lenders apply a vacancy allowance of 5 per cent, meaning they assume the property will sit empty for around two to three weeks each year when calculating whether you can afford the repayments.

How Lenders Calculate What You Can Borrow Against Equity

Lenders use your property's current value, not what you paid for it. They subtract your outstanding mortgage balance and cap the borrowing at 80 per cent of the property's value if you want to avoid Lenders Mortgage Insurance. Anything above that threshold attracts LMI, which can add thousands to your upfront costs and is not a claimable expense for investment purposes.

In the earlier scenario, the North Plympton family's home is worth $680,000. Eighty per cent of that value is $544,000. Subtract the $445,000 they still owe, and the accessible equity sits at $99,000. If they were willing to pay LMI, they could borrow up to 90 per cent or even 95 per cent of the property's value with some lenders, but the insurance premium would reduce the amount available for the deposit and settlement on the new property.

Debt-to-income caps also apply. From February this year, lenders can only approve a limited portion of their new investor lending at six times your gross annual income or higher. If your combined household income is $110,000 and your total borrowing across both properties exceeds $660,000, you may need a larger deposit or a lower purchase price to stay within the lender's risk settings.

Interest Only or Principal and Interest for Investment Loans

Interest only repayments keep your monthly costs lower and preserve cash flow, which matters when you're managing two mortgages. Most lenders offer interest only periods of one to five years on investment loans, after which the loan reverts to principal and interest unless you apply to extend.

An interest only loan on $400,000 at current variable rates might cost around $1,800 per month in repayments, compared to $2,400 for principal and interest. The rental income from the investment property helps cover that gap, and the lower repayment means you're not drawing heavily from your own income to service the debt.

Principal and interest loans reduce your debt over time and build equity in the investment property faster. If your goal is to use that second property's equity to purchase a third within a few years, paying down the loan accelerates your timeline. The trade-off is higher repayments and less flexibility if rental income fluctuates or you face a period between tenants.

What the Negative Gearing Changes Mean for Your Timeline

New legislation from June this year limits negative gearing for residential investment properties purchased from mid-May onwards. If you buy an established dwelling now, you can't offset rental losses against your salary or other income from July next year. Those losses can only be used against future rental income or capital gains when you sell.

That shifts the affordability calculation. In our earlier North Plympton example, if the family buys an established unit in a nearby suburb and the rental income falls $200 per week short of covering the mortgage, rates, insurance and other costs, they'll carry that $10,400 annual shortfall without any offset against their wages. Previously, that loss would have reduced their taxable income and delivered a refund of around $3,400 at a marginal rate of 32.5 per cent.

Eligible new builds are exempt. If you purchase a dwelling constructed on previously vacant land, or a property where the number of dwellings has increased, you can still negatively gear under the existing rules. For someone deciding between an established townhouse and a newly built unit at a similar price, the tax treatment now creates a meaningful difference in your annual cash flow and long-term return.

Refinancing Your Existing Home or Taking a Second Loan

You can access equity by refinancing your current home loan to a higher amount, or by keeping your existing mortgage and taking out a separate loan secured against the property. Each approach has different cost and flexibility implications.

Refinancing consolidates everything into one loan, which can simplify repayments and sometimes secure a lower rate if your current mortgage is several years old. The downside is that you'll pay discharge fees to exit your existing loan, and if you're currently on a fixed rate, break costs can run into the thousands.

A standalone equity release loan keeps your current home loan untouched. You take out a second mortgage against the property, and the funds are used exclusively for the investment purchase. This structure separates the debt, making it clearer which interest is deductible and which isn't. It also avoids break costs if your existing loan has a fixed period remaining.

Most lenders allow both structures, though some apply slightly higher rates to standalone equity loans because they sit behind the first mortgage in the security ranking.

How Rental Income Affects Your Borrowing Capacity

Lenders don't accept 100 per cent of the expected rent when calculating your borrowing capacity. They apply a vacancy buffer and an allowance for ongoing costs like rates, strata fees, insurance and maintenance. The net rental income is then added to your assessable income, but the loan repayment on the investment property is added to your commitments at a buffered rate.

If the investment property is expected to generate $450 per week in rent, lenders will assess around $427 per week after the vacancy allowance. From that, they'll deduct an estimate for non-mortgage costs, which might reduce the assessable figure to $350 per week. Meanwhile, the investment loan repayment is assessed at the product rate plus three percentage points, so a loan that actually costs $1,800 per month might be tested as though it costs $2,400.

This calculation often surprises buyers who assume the rental income will offset the loan repayment dollar for dollar. It doesn't, and the difference can reduce what you're approved to borrow by $50,000 to $80,000 compared to your initial estimate.

Stamp Duty and Settlement Costs You Need to Cover

Stamp duty on investment property in South Australia applies at the standard residential rate, and there are no concessions for investors. On a $500,000 purchase, stamp duty is $21,330. Add conveyancing, building and pest inspections, loan establishment fees and any LMI premium, and your total settlement costs will sit between $25,000 and $30,000.

Those costs can't be borrowed as part of the investment loan in most cases. Lenders expect you to pay them from your accessible equity or savings. If you're accessing $99,000 in equity and spending $28,000 on settlement, you're left with $71,000 for the deposit, which determines the purchase price you can afford.

Some buyers assume they can roll all the costs into the loan, but lenders calculate the loan amount based on the property's purchase price and their maximum loan-to-value ratio. If they'll lend 90 per cent of the property's value, that's 90 per cent of the contract price, not the contract price plus costs.

Fixed or Variable Rate for Your Investment Loan

Fixed rates lock in your repayment for one to five years, which helps with budgeting and protects you if rates rise. Variable rates move with the market, giving you the benefit of any cuts but exposing you to increases. Most investors split the loan between fixed and variable to balance certainty with flexibility.

A fixed rate also limits your ability to make extra repayments or access redraw without penalty, which matters less for an interest only investment loan but becomes relevant if you switch to principal and interest or want to pay down debt faster. Variable loans typically allow unlimited extra repayments and full redraw access, giving you more control if your income increases or you receive a windfall.

Rate discounts vary depending on the loan amount, your loan-to-value ratio, and whether you're borrowing for owner-occupied or investment purposes. Investor rates are typically 0.3 to 0.6 percentage points higher than equivalent owner-occupier rates, and that gap has widened slightly since the debt-to-income caps were introduced.

Call one of our team or book an appointment at a time that works for you. We'll review your equity position, walk through your options for structuring the loans, and connect you with lenders who support investment purchases for migrants in North Plympton and across South Australia.

Frequently Asked Questions