What Are Your Options to Use Home Equity for a Second Property?

Your home's equity can fund the deposit and costs on a second property, but only if the numbers work on both loans together. If you own a home in Melbourne and are thinking about buying again, this is the decision in front of you: whether to borrow against what you already own, and how to set it up safely.

How Does Using Home Equity to Buy a Second Property Work?

You refinance your home loan to a higher amount, then use the extra funds as the deposit and costs on the next property. The new borrowing is secured against your current home, so it carries real risk if things go wrong.

Equity is the gap between your property's value and what you owe. Lenders usually want your total borrowing to stay at or below a set loan to value ratio (LVR), often 80% if you want to avoid lenders mortgage insurance. Usable equity is the amount you can borrow above your current loan while staying under that limit. A lender will value your home before they confirm a figure, so a broker's estimate is a starting point only.

If you want a quick view of how a higher loan changes your repayments, the mortgage repayment calculator is a good place to start.

What Is the Difference Between Usable Equity and Total Equity?

Total equity is your home's value minus your loan. Usable equity is what a lender will actually let you borrow, after applying their maximum LVR.

As an example, say your home is valued at $900,000 and you owe $400,000. Your total equity is $500,000. At an 80% LVR, the lender allows total borrowing up to $720,000. Your usable equity is $320,000, which is $720,000 minus $400,000. That is the most you could release, before the lender checks your income and expenses.

Do You Need to Pass a Serviceability Test as Well?

Yes. Even with plenty of equity, a lender must be satisfied you can afford the repayments on all your loans. Equity gets you access to funds, but income decides how much you can borrow.

Lenders look at your income, living costs, existing debts and the rent the new property may earn. They also test your repayments at a higher rate than the one you will actually pay. If you are unsure where you stand, our page on borrowing capacity explains how this is assessed.

Should You Use a Split Loan When Releasing Equity?

A split structure is usually the sensible way to release equity for an investment. You keep your home loan as it is and set up a separate loan for the extra amount, so the debts stay distinct.

The main reason is tax. Interest on money borrowed to buy an investment property may be deductible, but interest on your home loan generally is not. Mixing the two in one account can make the records messy and the deductions harder to prove. Speak with your accountant about how your own situation would be treated, because no outcome is certain.

The trade-off is more accounts to manage, and the extra loan may carry a different rate or fees depending on your lender.

Example: Releasing Equity for an Investment Property in Melbourne

Here is how it can play out. Consider a Melbourne couple who own their home, have a modest loan balance, and want to buy an investment property. Their home is valued at $900,000 and they owe $400,000.

The situation: They have no spare savings, but they have $320,000 in usable equity at an 80% LVR. They want to release $120,000 to cover the deposit and purchase costs on a second property.

The solution: Their broker refinances the home loan and creates a separate $120,000 loan, taking their home borrowing to $520,000. The investment loan is set up separately so the interest stays traceable. The broker also checks that their income supports both loans.

The outcome: As an illustration only, at 6.75% p.a. interest-only, the $120,000 loan costs about $8,100 a year in interest, or about $675 a month. That is before any rent from the new property. The couple confirm that the rent and their budget can cover this, and the lender approves the refinance. Their accountant then explains how the interest may be treated at tax time.

The real figures will depend on the lender, the loan type and the purchase price.

What Are the Risks of Borrowing Against Your Home?

The main risk is that your family home now backs two loans. If the investment property sits empty, rents fall or interest rates rise, you still have to meet every repayment.

Property values can also fall, which reduces your equity and may limit future options. Some lenders charge fees to refinance or discharge a loan, and a fixed rate loan may have break costs if you leave early. It helps to keep a buffer in an offset or savings account, so a few months without rent does not put pressure on your home.

If your current loan is coming off a fixed term, read our guide on fixed rate expiry before you decide on timing.

How Can a Mortgage Broker Help You Refinance to Release Equity?

A mortgage broker compares lenders for you, estimates your usable equity, and structures the loans before you apply. Lenders differ in how they value property and assess rental income, so the right fit matters.

A broker can also check whether your existing loan still suits you. Our loan health check is a useful first step if you have not reviewed your home loan in a while. If you want to know what your property is worth before you commit, the property report gives you a clearer picture.

A broker will also tell you if waiting, or choosing a different approach, makes more sense for you. Not every refinance is worth doing, particularly if fees or a higher rate outweigh the benefit.

Call one of our team or book an appointment at a time that works for you, and we will work out how much equity you can use and whether a second property suits your goals.

Frequently Asked Questions