One of the most powerful accelerants for Australian property investors is using the equity in an existing property to fund the deposit on the next one. Done correctly, this strategy allows you to keep growing your portfolio without needing to save a fresh deposit from scratch each time. Done incorrectly, it can expose you to significant risk if markets fall or cash flow deteriorates. This guide explains exactly how equity works, how to calculate what you can access, and the steps to use it safely.
What is Home Equity and How is it Calculated?
Equity is the difference between your property’s current market value and what you owe on it. If your home is worth $800,000 and you owe $450,000, your equity is $350,000. However, not all of that equity is accessible. Lenders typically lend up to 80% of a property’s value without requiring lenders mortgage insurance (LMI). The accessible equity — or “usable equity” — is calculated as 80% of the property value minus the outstanding loan balance. In this example: ($800,000 × 0.80) − $450,000 = $640,000 − $450,000 = $190,000 of usable equity. That $190,000 can potentially be used as a deposit and purchasing costs for a new investment property.
How the Process Works Step by Step
Step 1 — Get a current valuation: Before approaching a lender, understand what your property is actually worth today. This might be a formal bank valuation or a comparative market appraisal from a local agent. Be conservative — banks often value below market, especially in rising markets. Step 2 — Calculate your usable equity: Use the formula above to determine what you can realistically access. Step 3 — Apply for an equity release (top-up loan or equity loan): You can either refinance your existing loan and draw the new funds, or add a line of credit or equity loan on top of your existing loan. The new funds are used as the deposit and buying costs for the investment property. Step 4 — Apply for the investment property loan: The equity release covers the deposit (typically 20% to avoid LMI) and costs (stamp duty, legal fees, etc.). The remaining purchase price is funded by a new investment loan secured against the investment property. Step 5 — Settlement: Both transactions complete simultaneously or in sequence, depending on lender and timing requirements.
Cross-Collateralisation — What It Is and Why to Avoid It
Some lenders will offer to “cross-collateralise” your properties — securing both loans against both properties simultaneously. This simplifies the initial process but creates serious problems later: if you want to sell one property, the lender controls the process because both properties secure both loans. If values fall, the lender can call in both loans together. Most experienced property investors and brokers recommend keeping properties on separate loans secured independently — it takes slightly more paperwork upfront but preserves your flexibility and control long-term.
Serviceability: The Other Half of the Equation
Having usable equity is only half the equation. You also need to demonstrate to the lender that you can service (afford to repay) the total debt across both properties. Lenders assess this using your income, existing liabilities, and the estimated rental income from the new investment property (typically assessed at 70–80% of the market rent to account for vacancies and costs). If your income doesn’t support the combined debt level, the lender won’t approve the loan regardless of how much equity you have. This is why high-earning professionals can build portfolios faster — their servicing capacity grows with each salary increase.
Risks of Using Equity to Invest
The primary risk is that you are borrowing against your home to invest. If the investment property performs poorly — vacancy, falling rents, significant maintenance, or a market downturn — you need to continue servicing both loans. In a severe scenario (significant market falls plus job loss), you could be forced to sell both properties to cover the debt. To manage this risk: maintain a cash buffer (3–6 months of combined loan repayments); choose investment properties with strong rental demand to minimise vacancy risk; don’t overextend — leave yourself a meaningful equity buffer rather than drawing every dollar of usable equity; and ensure your cash flow can sustain both properties even if rates rise by 2–3%.
Using equity is how most experienced Australian investors grow their portfolios beyond the first property. It works — but it requires discipline, conservative buffers, and a clear-eyed understanding of the risks. The strategy amplifies both gains and losses, so the property selection and cash flow management that follow matter just as much as the equity release itself.
One Property at a time
Brick by Brick 🧱
General Advice Warning: This article is general in nature and does not constitute personal financial advice. Please consult a licensed financial adviser before making investment decisions.
