Guide
Using home equity to buy an investment property
If your home has grown in value or you've paid down the loan, you may be able to use that equity as the deposit for an investment property instead of saving cash. Here's how it works, how much you can use, and how to set it up.
By Mossy Taheri, licensed buyer’s agent · Updated
The short answer
You can usually borrow against your home up to 80% of its value, less what you owe, and use that as the deposit and buying costs for an investment property. On a $1,000,000 home with $500,000 owing, that’s up to about $300,000, if your income supports the extra borrowing.
How using equity works
Equity is the part of your home you own outright: its value minus the loan. Lenders let you borrow against part of it. The usual approach is to take a loan secured by your home for the investment’s deposit and costs, and a second loan, secured by the investment property, for the rest of the price. You buy without saving the deposit in cash, but you borrow 100% of the cost.
How much equity you can use
| Amount | |
|---|---|
| Home value | $1,000,000 |
| 80% of value (the usual limit before LMI) | $800,000 |
| Less the current loan | −$500,000 |
| Usable equity | $300,000 |
| Needed for a $700,000 investment: 20% deposit plus costs | $175,000 |
Your borrowing capacity still has to support the total debt; see borrowing capacity. Estimate your own figure with the usable equity calculator.
Setting up the loans
- Keep the equity loan as a separate split, used only for the investment, so the interest is easy to track.
- Don't mix personal spending into the investment splits.
- Consider whether to keep the investment loans with a different lender from your home loan, so one property isn't security for both.
- Ask your broker about an offset account on the home loan rather than redraw.
Tax
What matters for tax is how the borrowed money is used, not which property secures it. Interest on money borrowed to buy an income-producing investment is generally deductible. Getting the structure wrong can make it hard to claim, so get advice from your accountant before you draw the funds. If you want to go further, see the equity recycling calculator.
Risks and checks
- Your home secures more debt; if you can't keep up repayments, it's at risk.
- A fall in values can leave you with little equity left in either property.
- Check the investment's cash flow at today's rates and with a buffer for rises.
- Keep a cash buffer for vacancies and repairs.
General information only, not personal financial, tax or credit advice.
Thinking of using your equity?
Book a free discovery call. We'll work out with you and your broker how much you can use and what to buy with it.
Book a free discovery callUsing home equity: common questions
How much equity can I use to buy an investment property?
Usually up to 80% of your home's value, less what you owe, before lenders mortgage insurance applies. On a $1,000,000 home with a $500,000 loan, that's $800,000 less $500,000: about $300,000 of usable equity, subject to your borrowing capacity.
Can I use equity as a deposit?
Yes. You borrow against your home to cover the investment's deposit and buying costs, and take a separate loan for the rest of the price. It means you can buy without saving the whole deposit in cash, but you're borrowing the full cost.
Is the interest on an equity loan tax deductible?
Generally, if the borrowed money is used to buy an income-producing investment, the interest on that portion is deductible, even though the loan is secured by your home. Keeping it as a separate loan split makes this much easier to show. Get tax advice before you set it up.
What are the risks of using home equity?
You're borrowing more against your home, so a fall in values or a rise in rates hits harder, and the home is at risk if you can't keep up repayments. Check the cash flow on the investment and keep a buffer.
General information only. It doesn’t consider your personal circumstances and isn’t financial, tax, credit or legal advice. Speak to a licensed professional before you act.