One of the most powerful advantages of owning property is the ability to use the equity you have built to purchase additional assets without needing to save an entirely new deposit from scratch. For Perth homeowners who have seen significant property value growth over the past few years, this strategy has become increasingly accessible and is one of the primary reasons experienced investors are able to build property portfolios over time.
This guide explains exactly how equity works, how to calculate how much you can access, and how to use it to purchase an investment property in Australia step by step.
What Is Equity and How Does It Build?
Equity is simply the difference between what your property is currently worth and what you still owe on your mortgage. If your home is valued at $900,000 and your outstanding loan balance is $550,000, your equity is $350,000.
Equity builds in two ways: through your regular loan repayments reducing the outstanding balance over time, and through capital growth the increase in your property’s market value. In Perth, strong property price growth over recent years has significantly accelerated equity accumulation for many homeowners, even those who purchased relatively recently.
How Much Equity Can You Actually Access?
Not all of your equity is available to access. Most lenders will lend up to 80% of your property’s current value before requiring LMI. This means the accessible equity is calculated as 80% of the current property value, minus your outstanding loan balance.
Using the earlier example: 80% of $900,000 is $720,000. Subtract the $550,000 outstanding balance, and the accessible equity is $170,000. This is the amount you could potentially draw on to fund a new purchase, without paying LMI.
It is possible to access equity above the 80% LVR threshold, but doing so typically requires LMI and increases your financial risk. Most brokers and financial advisers recommend staying within the 80% LVR when using equity for investment purposes.
To get a clearer picture of your current loan position and equity, speak with one of our brokers or use our Borrowing Power Calculator as a starting point.
Step 1: Get Your Property Valued
The first step is to establish the current market value of your property. There are two types of valuations relevant here. A desktop valuation is a quick estimate based on comparable sales data and is often used by lenders for preliminary assessments. A full valuation is conducted by a registered valuer and involves a physical inspection of the property. Lenders typically require a full valuation before approving an equity release or investment loan.
In a rising market like Perth, many homeowners find that their property is worth considerably more than they estimated, which can unlock more accessible equity than expected. It is worth getting an updated valuation even if you have a general sense of what your property might be worth.
Step 2: Understand Your Borrowing Capacity for the Investment Loan
Accessing equity provides your deposit for an investment property, but you still need to demonstrate to a lender that you can service the total debt your existing home loan plus the new investment loan. Lenders assess investment loan applications using the same serviceability framework as owner-occupier loans, but there are some important differences.
Most lenders will factor in the rental income from the proposed investment property, though they typically apply a discount (often 70% to 80% of the gross rental estimate) to account for vacancies and expenses. Your existing home loan repayments, living expenses, and any other debts are all taken into account.
The key point here is that your borrowing capacity for the investment loan is assessed separately from the equity release. You need both sufficient accessible equity and sufficient income to service both loans.
Step 3: Decide How to Structure the Equity Release
There are several ways to access equity for an investment purchase, and the right structure depends on your individual circumstances and goals.
The most common approach is to refinance your existing home loan to a higher amount and use the additional funds as the deposit for the investment property. This keeps the equity release and the investment loan with the same lender in some cases, but they can also be with different lenders.
Alternatively, some borrowers establish a separate home equity loan or line of credit secured against their existing property, which can then be used as the deposit. This approach keeps the two loans clearly separated, which can have tax accounting advantages for investment purposes.
Getting the loan structure right from the outset is important, particularly for tax purposes. Interest on loans used for investment purposes is generally tax deductible in Australia, but only if the loan is correctly structured and documented. It is strongly recommended that you speak with both a mortgage broker and a tax accountant before proceeding.
Step 4: Research the Right Investment Property
Before committing to a loan structure, you need to identify the type of investment property you are targeting and the market you want to buy in. Key factors to consider include rental yield (the annual rental income as a percentage of the property’s value), capital growth potential, vacancy rates in the area, proximity to infrastructure, and the condition of the property.
Perth’s property market has performed strongly in recent years, with a range of suburbs offering solid rental yields alongside capital growth. However, not all properties make good investments, and location selection is one of the most important decisions you will make. Speaking with a local buyers agent or conducting thorough research on suburbs of interest is time well spent before you start submitting offers.
Step 5: Apply for the Equity Release and Investment Loan
Once you have clarity on your equity position, borrowing capacity, preferred loan structure, and target property, you are ready to apply. If you are refinancing your existing home loan to access equity, that application goes alongside or prior to the investment loan application.
Your broker will gather all required documents including your most recent property valuation, payslips or tax returns, existing loan statements, rental appraisal from a property manager for the proposed investment, and any other financial documents the lender requires.
Our team at Central Lending Solutions handles the full application process on your behalf. We compare investment property loan options across multiple lenders to find the most competitive rate and structure for your situation.
Step 6: Settlement and Managing the Investment
Once your loans are approved and the investment property settles, your financial obligations expand to include repayments on both loans. Having a clear budget and a cash flow plan is essential at this stage. Most investors maintain a financial buffer typically three to six months of loan repayments to cover periods of vacancy or unexpected maintenance costs.
It is also important to review your insurance arrangements. Landlord insurance is strongly recommended for investment properties and covers you against damage by tenants, loss of rental income, and other property-specific risks that standard home insurance does not cover.
What Are the Risks of Using Equity to Invest?
Using equity to invest in property is a powerful strategy, but it is not without risk. The most significant risk is that if property values fall in either your existing home or the investment property your equity position can reduce quickly, and in a worst-case scenario you could find yourself owing more than your combined properties are worth.
Interest rate rises also increase the cost of servicing two loans simultaneously. While the current environment has seen rate cuts, rates can move in both directions over a 20 to 30-year investment horizon. Stress testing your ability to service both loans at a higher rate is a prudent step before proceeding.
Vacancy periods, unexpected maintenance, and changes in rental demand are also factors to plan for. Going in with realistic income and expense projections, rather than best-case assumptions, leads to better long-term outcomes.
Is Using Equity the Right Strategy for You?
Using equity to buy an investment property suits homeowners who have built meaningful equity, have stable income to service two loans, have a medium to long-term investment horizon, and are comfortable with the risks involved. It is not a strategy for buyers who are financially stretched on their existing loan or who have not thought through the ongoing costs of owning and managing an investment property.
The best way to assess whether this strategy is right for your situation is to speak with an experienced mortgage broker who understands both the lending landscape and the Perth property market. Contact our team at Central Lending Solutions to discuss your equity position and investment goals.
Frequently Asked Questions
How much equity do I need before I can buy an investment property?
As a general guide, you need enough accessible equity to cover the deposit and upfront costs of the investment property typically at least 10% to 20% of the investment property’s purchase price, plus stamp duty and purchase costs. For a $600,000 investment property in WA, you would typically need to access $60,000 to $120,000 in equity, plus purchase costs of approximately $25,000 to $35,000 depending on your stamp duty liability.
Does using equity to invest affect my existing home loan?
If you refinance your home loan to access equity, your existing loan balance will increase and your repayments will go up accordingly. If you establish a separate equity loan or line of credit instead, your home loan remains the same but you have an additional loan facility secured against the same property. Either way, your total debt increases, which affects your overall financial position and borrowing capacity.
Is the interest on an investment loan tax deductible?
In Australia, interest on a loan used to purchase an income-producing asset such as a rental property is generally tax deductible. However, the deductibility depends on the loan being correctly structured and the property genuinely being used to generate income. It is important to get advice from a qualified accountant to ensure your loan structure maximises your tax position and meets ATO requirements.
Can I use equity from an investment property to buy another investment property?
Yes. The same equity access principles apply to investment properties as to owner-occupied homes. If your investment property has increased in value and you have built equity beyond the 80% LVR threshold, that equity can potentially be used as a deposit for a further purchase. This is a common strategy used by experienced property investors to build portfolios over time.
What is the difference between an equity release and a line of credit?
An equity release typically involves refinancing your loan to a higher balance and receiving the additional funds as a lump sum, which you then use for a specific purpose such as a property deposit. A line of credit is a revolving credit facility secured against your property’s equity, from which you can draw funds as needed up to an approved limit. Lines of credit offer flexibility but require strong financial discipline, as the interest compounds on any drawn balance.
Ready to Use Your Equity to Invest in Property?
If you own a home in Perth and are thinking about using your equity to build wealth through investment property, our team at Central Lending Solutions can help you understand your options, structure your loans correctly, and find the most competitive rates across multiple lenders at no cost to you. Book a free consultation today.