If you’ve owned your home for a while, there’s a good chance you have more equity than you realise, and that equity can potentially fund a deposit on an investment property without you needing a separate cash lump sum. But “using equity” is often talked about loosely, so it’s worth understanding exactly what it means, how it’s calculated, and what a lender will actually assess before you get too far into planning a purchase. If you’re weighing up your next step, our property investment loan service is a good place to start.
What Is Equity, Exactly?
Equity is the difference between what your property is worth and what you still owe on it. If your home is valued at $900,000 and your remaining loan balance is $500,000, you have $400,000 in equity.
That doesn’t mean all $400,000 is available to borrow against, though, which is where usable equity comes in.
Equity vs Usable Equity
This is the distinction that trips a lot of people up.
Total equity is simply value minus debt, as above.
Usable equity is the portion a lender will actually let you access, and it’s typically calculated based on a maximum loan-to-value ratio (LVR), commonly around 80% of the property’s value, though this varies by lender.
Using the same example: if a lender caps usable equity at 80% LVR, that’s 80% of $900,000 ($720,000), minus your existing loan of $500,000, leaving $220,000 in usable equity, not the full $400,000.
Some lenders will go beyond 80% LVR in certain circumstances, but this often brings Lenders Mortgage Insurance back into the picture, which changes the cost-benefit of the strategy.
How Do You Actually Use Equity to Buy Another Property?
In practice, using equity usually means one of two things:
- A separate equity loan or line of credit, secured against your existing property, which provides funds you can use as a deposit (and sometimes costs) for the new purchase.
- Restructuring your existing loan to release usable equity as part of a broader refinance. This is where reviewing and restructuring your current loan comes into play.
Either way, the equity itself typically becomes the deposit, plus, if there’s enough equity, potentially some or all of the purchase costs, while the new property is generally financed with its own separate loan.
This is different from simply “spending” the equity. You’re not withdrawing cash from thin air. You’re increasing your total borrowing, secured partly against your current home and partly against the new property, so it’s a genuine debt decision, not a free source of funds.
What Will a Lender Assess?
Accessing equity isn’t automatic just because it exists on paper. Lenders will typically look at:
- Current property value. Usually confirmed via a formal valuation, not just an online estimate. Actual usable equity depends on what the property is genuinely worth today.
- Existing loan balance and repayment history. This affects both usable equity and how the lender views your overall risk profile.
- Borrowing capacity for the new loan. Equity gives you access to a deposit, but you still need to demonstrate you can service the new loan (or the combined repayments across both properties) based on your income and expenses.
- Rental income (if applicable). For an investment property, lenders will typically factor in a portion of expected rental income when assessing your borrowing capacity, though usually not the full amount.
A Note on Cross-Collateralisation
When you use equity from an existing property to help fund a new one, it’s worth understanding whether the lender is structuring this as cross-collateralised loans (where both properties secure both loans) or as separate, standalone securities.
Cross-collateralisation can simplify some paperwork, but it also means the properties become linked from a lending perspective, which can make things like selling one property, or refinancing just one loan later, more complicated than if the loans had been kept separate from the start. This is a structuring decision worth discussing properly rather than defaulting into, particularly for investors planning to build a portfolio over time.
What If Property Values Fall?
Equity is based on current market value, which can move in either direction. If property values fall after you’ve used equity to purchase, your usable equity position can shrink. This doesn’t retrospectively change existing loans, but it’s a factor worth understanding before stretching a strategy to its limit, particularly if you’re planning to use equity again in future for further purchases.
How a Mortgage Broker Can Help
Working out how much usable equity you actually have, and how to structure a purchase around it sensibly, depends on more than a rough valuation guess. A broker can:
- Arrange a formal or lender-indicative valuation to establish your actual equity position
- Calculate usable equity based on current lending policy, not outdated LVR assumptions
- Compare loan structures (cross-collateralised vs standalone) and explain the trade-offs for your situation
- Assess your borrowing capacity for the new loan, factoring in likely rental income where relevant
- Help you understand how much deposit and costs your equity could realistically cover
Frequently Asked Questions
How much equity do I need to buy an investment property?
There’s no fixed figure. It depends on your usable equity (not total equity), the price of the property you’re considering, and your borrowing capacity for the new loan. A broker can model this based on your actual numbers.
Can I use equity instead of cash savings for a deposit?
Often yes, for eligible borrowers with enough usable equity. You’re still taking on additional debt, so it’s assessed the same way a cash deposit and new loan would be.
What’s the difference between equity and usable equity?
Equity is your property value minus what you owe. Usable equity is the portion a lender will actually let you borrow against, typically limited to around 80% of the property’s value (varies by lender), minus your existing loan balance.
Do I need a formal valuation to access equity?
Most lenders will require some form of valuation, formal or automated, depending on the lender and loan size, to confirm your property’s current value before releasing equity.
Is using equity to buy an investment property risky?
It increases your total debt and links your financial position across two properties, so it carries real risk if your circumstances or the market change. It’s not inherently risky, but it should be assessed with realistic numbers rather than optimistic assumptions.
Should my new loan be cross-collateralised with my existing property?
Not necessarily. This is a structuring choice with genuine trade-offs. It’s worth discussing with a broker before defaulting into whatever structure is offered first.
Thinking About Using Equity to Buy Your Next Property?
Book a free appointment with Money Tree Mortgage Brokers and we’ll work out your actual usable equity and borrowing capacity before you start looking.
Book a Free Assessment
