Understanding the basics of using home equity for investment

If you own a home in Park Orchards and you've built up equity over the years, that equity can become the deposit for an investment property without needing to save another cash lump sum.

The concept is straightforward: lenders allow you to borrow against the equity in your current home to fund the deposit and costs on a second property. The mechanics, lending criteria, and taxation treatment have all shifted significantly since the middle of last year, and understanding those changes matters if you're planning to add a rental property to your portfolio.

How lenders calculate usable equity

Most lenders allow you to access equity up to 80 per cent of your home's current value, minus what you still owe. If your Park Orchards home is valued at $1,200,000 and you have $400,000 remaining on the mortgage, you can typically borrow up to $960,000 in total, which leaves $560,000 in accessible equity. That figure needs to cover the deposit on the investment property, stamp duty, and any lending costs.

A smaller number of lenders will go to 90 per cent of the home's value, but that triggers Lenders Mortgage Insurance on the increased borrowing, and the premium gets added to your loan balance. The calculation also needs to fit within the debt-to-income cap that came into effect in February. ADIs can only write up to 20 per cent of new investor loans at a debt-to-income ratio of six times or more, so if your combined borrowing pushes you above that threshold, approval becomes harder to secure even if the equity exists on paper.

Rental income from the investment property is included in serviceability calculations, but lenders apply a haircut. Most will shade the rent by 20 per cent to account for vacancy and management costs, so a property generating $600 per week in rent is treated as $480 for serviceability purposes. If you're looking at investment loans that include an interest-only period, serviceability is still tested on principal and interest repayments at the assessment rate, which sits three percentage points above the actual product rate under the current APRA buffer.

Negative gearing changes and what they mean for properties purchased now

From 1 July 2027, net rental losses on residential investment properties acquired on or after 7:30pm AEST on 12 May 2026 can no longer be offset against your salary or other non-rental income. Those losses are quarantined and can only be used against future rental income or future capital gains on residential property.

If you're buying an investment property using equity right now, that property falls under the new rules. The transitional period allows full negative gearing until 30 June 2027, but after that date, any shortfall between rental income and your loan repayments, rates, insurance, and other holding costs stays in a separate ledger. You can't claim it against your wage or salary to reduce your tax bill.

The exception is eligible new builds: properties constructed on previously vacant land, or developments that increase the total number of dwellings. A knock-down rebuild that replaces one dwelling with one dwelling doesn't qualify. If you're considering new construction and want to retain access to full negative gearing, the dwelling needs to meet the definition in the legislation, and that definition is narrow.

Properties you already own, or properties you exchanged contracts on before 7:30pm AEST on 12 May 2026, are grandfathered. You can continue to claim rental losses against other income until you sell. That grandfathering doesn't transfer to the next owner.

Interest-only versus principal and interest on an investment loan

Interest-only repayments reduce your monthly outgoing and can improve cash flow if the rental income doesn't quite cover the full cost of holding the property. Most lenders offer interest-only periods of one to five years on investment loans, after which the loan reverts to principal and interest unless you apply for an extension.

The benefit is short-term cash flow. The downside is that you're not reducing the loan balance, so at the end of the interest-only period, your principal and interest repayment will be higher than it would have been if you'd started paying down the loan from day one. That repayment is calculated over the remaining loan term, so if you took a 30-year loan and had five years interest-only, the principal gets repaid over 25 years instead of 30.

Interest-only also means you're not building equity in the investment property through loan reduction. Any equity growth comes entirely from capital appreciation. In a flat or falling market, that can leave you in a position where the investment property hasn't increased in value and you still owe the full purchase price plus costs.

Some investors in Park Orchards prefer principal and interest from the outset because it forces loan reduction and provides a buffer if the property needs to be sold during a downturn. Others use interest-only to maximise cash flow and direct surplus income toward offset accounts linked to their owner-occupied loan, which saves more in non-deductible interest. The right structure depends on your broader financial position and your plans for the property over the next ten years. We work through those scenarios with you before submitting anything.

Structuring loans when you're borrowing against your home and buying an investment property

When you're using equity from your Park Orchards home to fund an investment property, the way the loans are structured affects both your tax position and your flexibility down the track.

The borrowing secured against your home should be split. The portion used to acquire or hold the investment property can be claimed as a deduction against rental income, provided the funds are used for that purpose and the use can be traced. The portion that relates to your owner-occupied home remains non-deductible. If you refinance later or draw down additional funds, the ability to claim interest depends on what those funds are used for, not which property secures the loan.

Most lenders allow you to establish separate loan splits at the outset. One split covers the amount drawn to fund the investment deposit and costs, and that split is treated as investment borrowing. The other split covers your remaining home loan balance, and that stays as owner-occupied debt. Keeping them separate from day one avoids the need to reconstruct records later if the ATO asks you to demonstrate the purpose of each borrowing.

Consider a buyer who owns a home in Park Orchards with $500,000 in accessible equity and wants to purchase a $700,000 investment property in Croydon. They need $140,000 for a 20 per cent deposit, plus roughly $40,000 for stamp duty and costs. They increase the borrowing on their home by $180,000, structured as a separate loan split. Interest on that $180,000 is deductible against the rental income from the Croydon property. Interest on the remaining home loan balance is not. The investment property itself is funded with a separate investment loan of $560,000, and interest on that loan is also deductible. The structure keeps the tax treatment clear and makes future refinancing or portfolio adjustments much easier to manage.

Variable or fixed rates for investment borrowing

Variable rates on investment loans sit higher than variable rates on owner-occupied loans, typically by 0.20 to 0.60 percentage points depending on the lender and your loan-to-value ratio. Fixed rates are also higher for investment purposes. That margin reflects the higher regulatory capital weighting applied to investor lending and the additional risk lenders assign to non-owner-occupied security.

A variable rate gives you full flexibility to make extra repayments or pay the loan out without penalty. It also exposes you to rate rises, and if you're relying on rental income to cover most of the repayment, a rate increase can turn a neutral cash flow position into a negative one quickly.

A fixed rate locks in your repayment for the fixed period, which can be one to five years depending on the lender. That certainty helps with budgeting, particularly if you're holding the property on thin cash flow margins. The trade-off is limited flexibility: most fixed rate products allow up to $10,000 or $20,000 in additional repayments per year, and breaking the loan early can trigger significant break costs if rates have fallen since you fixed.

Some investors split their investment loan between fixed and variable, which provides partial rate protection while retaining some offset and repayment flexibility on the variable portion. Others fix the entire amount if they're purchasing in a rising rate environment and want repayment certainty for the first few years. There's no universal right answer, and the decision should be informed by your risk tolerance, cash flow position, and your plans for the property. We talk through the scenarios that apply to your situation and help you weigh the options before locking anything in.

Serviceability under the debt-to-income cap

The debt-to-income cap that took effect in February applies separately to investor loans and owner-occupied loans, but it's calculated on your total debt, not just the new borrowing. If your gross annual income is $150,000 and you're applying for investment lending that would take your total debt to $950,000, your DTI sits at 6.3 times. That application falls into the restricted bucket, and the lender can only approve it if they haven't already allocated their 20 per cent quota for high-DTI investor loans in the relevant reporting period.

For Park Orchards buyers who have owned their home for a decade or more and built up significant equity, the DTI cap is often the binding constraint rather than loan-to-value ratio. You might have $600,000 in accessible equity, but if your income doesn't support the combined debt load under the cap, the application won't proceed regardless of how much security you can offer.

Rental income helps, but as noted earlier, it's shaded. If you're buying a property that generates $30,000 per year in gross rent, lenders treat that as $24,000 for serviceability purposes. The shortfall between the shaded rent and your actual loan repayment, plus property expenses, gets added to your existing commitments when the DTI is calculated.

Some lenders are more conservative than others in how they apply the cap, particularly for borrowers sitting close to the six-times threshold. We work with lenders across the panel who take different approaches to DTI assessment and rental income shading, and that often makes the difference between an approval and a decline when the numbers are tight. If you're planning to use equity to fund an investment purchase, running the serviceability and DTI calculation before you start looking at properties will show you what's possible and where the limits sit.

What happens at tax time under the new rules

Under the quarantining rules that take effect from 1 July 2027, rental losses on affected properties are still deductible, but only against rental income or future capital gains on residential property. If you have two investment properties and one makes a profit while the other runs at a loss, you can offset the loss against the profit. If both properties run at a loss, those losses accumulate and get carried forward.

Interest, rates, insurance, property management fees, repairs, and depreciation all remain claimable, but the claim is confined to the quarantine. You don't lose the deduction; you defer it until you have rental income or a capital gain to offset it against.

If you sell the property, any carried-forward rental losses can be applied against the capital gain before tax is calculated. That means the losses aren't wasted, but they also don't provide a cash flow benefit in the years you're holding the property if you don't have other rental income to offset them against.

For someone using equity from their Park Orchards home to buy a rental property now, the immediate tax benefit of negative gearing is limited to the transitional period ending 30 June 2027. After that, the holding cost needs to be funded from after-tax income unless you already own other investment properties generating positive rental income. If you're relying on a tax refund each year to help cover the shortfall, that refund disappears from 1 July 2027 unless the property is an eligible new build.

We're not tax advisers, and the interaction between quarantined losses, carried-forward amounts, and your broader tax position should be reviewed with an accountant who understands your full circumstances. What we can do is structure the lending in a way that preserves your options and makes sure the loan documentation supports the tax treatment you're seeking.

Using equity to fund a purchase in a rising or falling market

When you borrow against your home to fund an investment purchase, you're increasing your total debt at the same time you're buying an asset. If the investment property increases in value, your overall equity position improves. If it falls, you're carrying higher debt without a corresponding increase in asset value, and that can reduce your borrowing capacity for future purchases or refinancing.

Park Orchards has seen steady capital growth over the long term, and many homeowners in the area have substantial equity built up over ten or fifteen years. Using that equity to acquire a second property works well when the asset you're buying is likely to hold or increase in value over your intended holding period. It works less well if you're buying at the top of a cycle and the property falls in value shortly after settlement.

Timing the market perfectly is not realistic, but understanding where the suburb you're buying into sits in its cycle, what the vacancy rate looks like, and whether rental demand is stable or falling will give you a clearer picture of the risk you're taking on. We work with buyers who are adding to their portfolio using equity, and part of that conversation involves looking at the numbers for the area they're targeting and making sure the purchase makes sense independently of any short-term capital growth assumptions.

If the property is intended as a long-term hold and the rental income is strong enough to cover most or all of the holding costs under the new taxation rules, short-term value fluctuations matter less. If you're planning to sell within a few years, or if you're relying on capital growth to maintain serviceability for future borrowing, a downturn in the investment property's value can limit your options.

Call one of our team or book an appointment at a time that works for you. We'll work through your equity position, your income, and your plans for the investment property, and structure the lending in a way that fits your circumstances and keeps your options open as the tax rules and lending environment continue to shift.

Frequently Asked Questions