In short: You can use the equity in your home as the deposit for an investment property by borrowing against it, usually up to 80% of your home's value less your current loan. On an $850,000 home with a $450,000 loan, that is $230,000 of usable equity, enough to cover a 20% deposit plus stamp duty on a $600,000 Melbourne investment property without any cash savings.
Most Melbourne investors do not save a second deposit. They borrow it against a home that has risen in value while they paid the loan down. This guide explains how usable equity is calculated, the loan structures that keep your tax position clean, how lenders test the whole arrangement, and the traps that catch people who let a bank tie everything together.
Equity versus usable equity
Equity is the difference between what your home is worth and what you owe. Usable equity is the part a lender will actually release, and it is smaller, because lenders keep your total borrowing at or below 80% of the home's value (sometimes 90% if you accept lenders mortgage insurance).
Usable equity = (home value × 80%) − current loan balance.
| Home value | 80% of value | Loan $400,000 | Loan $450,000 | Loan $500,000 |
|---|---|---|---|---|
| $700,000 | $560,000 | $160,000 usable | $110,000 usable | $60,000 usable |
| $850,000 | $680,000 | $280,000 usable | $230,000 usable | $180,000 usable |
| $1,000,000 | $800,000 | $400,000 usable | $350,000 usable | $300,000 usable |
Two things move these numbers. A higher valuation increases usable equity, which is why a full valuation rather than a desktop estimate can matter. And usable equity is only the ceiling: you still have to service the new debt.
Run your own figures in the equity calculator and check your current position with the LVR calculator.
How much equity a purchase needs
For a $600,000 investment property bought at 80% LVR (no LMI on the investment loan):
| Cost | Amount |
|---|---|
| 20% deposit | $120,000 |
| Victorian stamp duty (general rate: $2,870 + 6% of amount over $130,000) | $31,070 |
| Conveyancing, inspections, registration, lender fees | approx. $3,000 |
| Equity required | approx. $154,000 |
So the $850,000 home with a $450,000 loan (usable equity $230,000) comfortably funds it, with about $76,000 in reserve. The $700,000 home with a $500,000 loan (usable equity $60,000) cannot fund a 20% deposit; it could fund a 10% deposit if the investment loan goes to 90% LVR with LMI, or the owner waits for more growth. The stamp duty calculator gives the duty for any price.
Loan structures that work
Separate equity loan against your home (recommended)
You take a new loan split secured only by your home, for the deposit and costs. The investment property is bought with a separate loan secured only by the investment property. Two loans, two securities, one clean purpose for each.
Advantages: the interest on the equity split is deductible because the money bought an income-producing asset; each property can be sold or refinanced independently; and if the investment property is with a different lender you are not exposed to one bank's policies.
Top-up or increase on your existing loan
Cheaper and quicker to set up, but only acceptable if the lender creates a distinct split. Increasing a single owner-occupier loan and drawing the extra for the investment mixes deductible and non-deductible interest, which makes your accountant's life difficult and can cost you deductions.
Line of credit
A revolving facility against your home that you draw as needed. Flexible for buying at auction or funding renovations, but rates are higher and the undrawn limit counts against your borrowing capacity at the APRA buffer.
Cross-collateralisation (avoid where possible)
The lender takes both properties as security for one combined loan. It is easy for the bank and can squeeze out a slightly higher total borrowing, but it means the bank controls both titles, a fall in one valuation affects your whole position, selling one property requires the bank's consent and a revaluation of the other, and moving to another lender later means refinancing everything at once.
The tax rule that matters most
Deductibility follows the purpose of the borrowing, not the property that secures it. If you borrow $154,000 against your Epping home and use it to buy a rental in Wollert, the interest on that $154,000 is deductible. If you later redraw $20,000 from the same split to buy a car, that portion becomes non-deductible and you must apportion every interest payment from then on. Keeping investment borrowing in its own split, with no personal transactions ever passing through it, is the single most important habit. The ATO's guidance on interest deductions is at ato.gov.au.
See negative gearing explained for how the deductible interest flows through to your tax return.
Serviceability check
Releasing equity means borrowing more, and lenders test the full picture:
- Your existing home loan, the new equity split and the investment loan are all assessed at your rate plus 3 percentage points. For illustration, at 6.00% p.a. that is a 9.00% p.a. test rate.
- Only 70–80% of the expected rent is counted.
- Credit card limits, car loans and HECS are deducted from capacity.
A couple in Epping earning $180,000 combined with a $450,000 home loan will typically service a $600,000 investment purchase, but the same couple with two car loans and $30,000 of credit limits may not. The borrowing power calculator shows how far the buffer bites, and how to improve borrowing power lists quick wins such as closing unused cards.
The valuation step
The lender orders a valuation of your home before releasing equity. Three types exist:
| Valuation type | When used | Effect on you |
|---|---|---|
| Automated (desktop) | Low LVR, standard suburbs | Fast, but often conservative; may undervalue a renovated home |
| Kerbside | Mid-range LVR | Valuer views the exterior only |
| Full internal | Higher LVR, unusual properties, large equity release | Most accurate; renovations and finishes are counted |
If a desktop figure comes in low, ask the broker to request a full valuation, or try a different lender. Valuations from two lenders on the same Epping house can differ by $50,000 or more.
Worked example: Epping homeowner
Priya and Deepak bought in Epping seven years ago. The home is now worth $850,000 and the loan balance is $450,000.
| Step | Figure |
|---|---|
| Usable equity (80% × $850,000 − $450,000) | $230,000 |
| Investment target: Mernda townhouse | $600,000 |
| Equity split drawn for deposit and costs | $154,000 |
| Home loan position after release | $604,000 (71% LVR) |
| Investment loan (80% of $600,000), interest-only | $480,000 |
| Total debt | $1,084,000 |
| Rent ($480 per week) | $24,960 per year |
| Interest on $634,000 of investment-purpose debt (for illustration, at 6.00% p.a.) | $38,040 per year |
| Running costs and land tax | $6,500 per year |
| Pre-tax shortfall | $19,580 per year |
| Tax saving at 32% marginal rate (30% + 2% Medicare) | approx. $6,266 |
| After-tax holding cost | approx. $13,300 per year, about $256 per week |
They have used no cash, kept both loans separate, and can model growth against that $256 per week in the investment property cashflow calculator. If Mernda grows 4% a year, that is $24,000 of growth in the first year against $13,300 of cost. Our Epping mortgage broker page covers local values.
Equity release checklist
- Estimate your home's value from recent comparable sales, then let the lender value it.
- Calculate usable equity at 80% LVR.
- Work out the total the investment needs: deposit plus stamp duty plus costs.
- Confirm serviceability with all debts tested at rate plus 3 points.
- Choose the structure: separate split, separate lender for the investment loan where sensible.
- Never mix personal spending into the investment split.
- Get a rental appraisal before applying.
- Keep a cash buffer separate from the equity release.
- Ask your accountant about ownership names before signing the contract.
- Diary a review when the investment property has grown enough to release its own equity for the next purchase.
Common mistakes
- Letting the bank cross-collateralise because it was the default option. Ask for standalone securities.
- Mixing loan purposes, then discovering at tax time that only part of the interest is deductible.
- Using redraw on the owner-occupier loan for the investment deposit. The money is deductible in principle, but the paper trail is messy and the split still carries the home loan's non-deductible balance.
- Over-leveraging. Borrowing 100% of the investment purchase plus costs works while rates and rents cooperate. Keep total LVR across both properties under 80% where you can.
- Releasing equity for a deposit before checking serviceability, then failing on the second loan and paying interest on money you cannot use.
- Forgetting land tax. The new property is not your principal place of residence, so it is taxable from the first year. See land tax in Victoria explained.
Frequently asked questions
How much equity do I need to buy an investment property?
Roughly 25% of the investment property's price: 20% for the deposit and about 5–6% for Victorian stamp duty and costs. For a $600,000 purchase that is about $154,000 of usable equity. If you accept LMI on the investment loan at 90% LVR, you need around $95,000. Usable equity is 80% of your home's value less your loan balance.
Can I use equity as a deposit without cash?
Yes. The equity loan is the deposit. Lenders release the funds into your account before settlement (or pay them directly at settlement), and the investment property is financed separately at up to 80–90% of its value. Most lenders do not require genuine savings on an equity-funded investment purchase, though they will still test your income against the total debt.
Is using equity to buy an investment property a good idea?
It is the most common way Australians build a second property, and it works when the numbers do: serviceability at the buffer rate, a cash reserve for vacancies and repairs, and a property with real growth prospects. It is a poor idea if it pushes total borrowing above what you can comfortably repay if rates rise 2%, or if you rely on the tax deduction to make the numbers work.
Does using equity increase my repayments?
Yes. Borrowing $154,000 against your home adds about $770 a month in interest (for illustration, at 6.00% p.a.) on top of the investment loan itself. Rent offsets part of that, and the tax deduction on investment-purpose interest offsets more. Model the full picture, including a rate rise, before you commit rather than looking at the equity loan in isolation.
What is cross-collateralisation?
Cross-collateralisation is when a lender uses two or more of your properties as security for one loan or a linked group of loans. It simplifies things for the bank but ties your properties together: selling or refinancing one requires the lender's consent and a revaluation of the others, and one lender's policies govern your entire portfolio. Standalone loans with a separate security for each property are usually better.
Can I use equity if I still have LMI?
Only if your home has grown enough to bring the combined loans under 80% of its value, or you pay LMI again on the higher balance. If you bought two years ago at 95% LVR, usable equity at 80% is unlikely to exist yet. The alternative is waiting for growth or paying the loan down faster. The understanding LVR and LMI guide explains the thresholds.
Talk to GNT Finance
Gorakh Timilsina assessed hundreds of equity release and investment applications as a senior credit officer before founding GNT Finance, so we know how to structure the loans so they get approved and stay tax-clean. We help homeowners across Melbourne's north and beyond, at no cost to you for our home-loan service in most cases. Book a free consultation or call 0426 403 703.
This page is general information only and not legal, tax or financial advice. Laws change — confirm current rules with the State Revenue Office, the ATO or a licensed professional.
Written by Gorakh Timilsina
Founder, CEO & Senior Mortgage Consultant at GNT Finance. Gorakh started as a broker assistant, spent years as a senior credit officer assessing loan applications, and now helps Melbourne families get the right loan approved. English, Nepali and Hindi spoken.