Using Equity to Buy an Investment Property: What Not to Do

If you own a property in Doncaster with equity available, you can use that equity to fund a deposit and settlement costs on an investment property without saving again from scratch.

Equity release works by refinancing your existing home loan or adding a second loan secured against your home. The equity you can access depends on your property's current value, your outstanding loan balance, and the lender's maximum loan-to-value ratio. For investment lending, most lenders will cap your total borrowing at 80 per cent of your property value to avoid Lenders Mortgage Insurance, though some products allow up to 95 per cent with LMI.

Consider a buyer who owns a home in Doncaster valued at $1.1 million with $400,000 remaining on the mortgage. At 80 per cent LVR, the buyer has access to $880,000 in total lending, leaving $480,000 in usable equity after repaying the existing loan. That equity can fund a deposit, stamp duty, legal fees, and other upfront costs on a second property.

Calculating How Much Equity You Can Use

Usable equity is not the same as the total equity in your property. Lenders calculate it as the difference between your property's value multiplied by the lender's maximum LVR and your current loan balance. If your property is worth $1.1 million and you owe $400,000, your total equity is $700,000. At 80 per cent LVR, your usable equity is $480,000.

You do not need to withdraw all your equity at once. Most buyers release enough to cover the deposit and settlement on the investment property, then service both loans from rental income and personal cashflow. If you release more than needed, you pay interest on funds sitting idle.

Interest rates on investment loans are typically higher than owner-occupied rates. Lenders also apply serviceability buffers and debt-to-income caps more conservatively for investment borrowing. From 1 February 2026, APRA limited lenders to funding no more than 20 per cent of new investor loans at a debt-to-income ratio of six times or greater, which tightens access for buyers with multiple properties or limited income.

What the Negative Gearing Changes Mean for Equity-Funded Purchases

From 1 July 2027, residential investment properties acquired on or after 7:30pm AEST on 12 May 2026 will have rental losses quarantined. You can no longer offset those losses against salary or other income unless the property qualifies as an eligible new build. Losses can still be offset against other residential rental income or carried forward to reduce future rental income or capital gains.

If you purchased or exchanged contracts on a property before 7:30pm AEST on 12 May 2026, existing negative gearing rules apply until you sell. If you purchased between that date and 30 June 2027, existing rules apply until 30 June 2027 only, after which the new quarantine rules take effect.

Properties that qualify as eligible new builds retain full negative gearing. An eligible new build is a dwelling constructed on previously vacant land or a development that increases the number of dwellings on a site. A knock-down rebuild that replaces one dwelling with one dwelling does not qualify. If a new build is occupied for more than 12 months before sale, the next investor loses access to negative gearing.

Serviceability and the Debt-to-Income Cap

Lenders assess your ability to service both your existing home loan and the new investment loan at the same time. Serviceability is tested at the loan's interest rate plus a three percentage point buffer, and lenders apply a haircut to rental income, typically 80 per cent, to account for vacancy and maintenance costs.

The debt-to-income cap applies separately to investment and owner-occupied portfolios. If your total debt is more than six times your gross income, you may be excluded from some lenders entirely. In our experience, buyers with multiple properties or those borrowing at high LVR often need to compare a wider range of lenders to find a product that fits.

If your income is stable but your debt-to-income ratio is marginal, restructuring your existing loans or choosing interest-only repayments on the investment property can reduce your monthly commitments and improve serviceability. Interest-only periods are typically available for up to five years on investment loans, after which the loan reverts to principal and interest unless renewed.

Interest-Only or Principal and Interest for Investment Borrowing

Interest-only repayments reduce your monthly outgoings and improve cashflow during the holding period. Because interest on investment borrowings is deductible, many investors prefer interest-only structures to maximise tax deductions and minimise after-tax cost.

Principal and interest repayments reduce your loan balance over time and build equity in the investment property. This can be useful if you plan to hold long term or if your income is strong enough that cashflow is not a constraint. Lenders also apply slightly lower interest rates to principal and interest loans, though the difference is often small.

Your choice depends on your cashflow, tax position, and whether you plan to sell or refinance within the interest-only period. If your income is variable or you expect rental vacancy in the early years, interest-only provides a buffer. If your income is secure and you want to reduce debt faster, principal and interest may suit.

Fixed or Variable Rate for an Equity-Funded Investment Loan

Fixed rates provide certainty over repayments for a set period, typically one to five years. Variable rates move with the market and allow unlimited extra repayments and access to redraw or offset accounts without penalty.

If you fix the rate on an investment loan and then sell the property or refinance during the fixed period, you may incur break costs. Break costs are calculated based on the difference between your fixed rate and the lender's cost of funds at the time you exit. These can run into thousands of dollars if rates have fallen since you fixed.

Many buyers split the loan between fixed and variable, which allows some repayment certainty while retaining flexibility on part of the debt. Splitting also reduces exposure to break costs if you need to exit early. Before choosing a fixed rate, confirm whether the loan allows extra repayments during the fixed period and whether there are caps on prepayment amounts.

Doncaster Market Characteristics and Proximity to Infrastructure

Doncaster is located 15 kilometres east of Melbourne's CBD and benefits from proximity to Westfield Doncaster, the Eastern Freeway, and several bus routes connecting to the city and surrounding suburbs. The area attracts families and professionals, with steady demand for both houses and units near shopping precincts and parkland.

Rental yields in Doncaster vary depending on property type and location. Units near The Pines Shopping Centre and Doncaster Road tend to achieve higher yields than larger houses in established pockets further from transport. Vacancy rates in the area are generally low, though investors should factor at least four to six weeks of vacancy per year into their cashflow projections.

When selecting an investment property, consider body corporate fees, land tax, and council rates as ongoing costs that reduce net rental income. Doncaster properties with higher body corporate fees due to facilities such as lifts, pools, or security may deliver lower net yields despite strong gross rental returns.

Lenders Mortgage Insurance and LVR Considerations

If your total borrowing across both properties exceeds 80 per cent of the combined property values, you will likely pay Lenders Mortgage Insurance. LMI is a one-off premium that protects the lender if you default. It is not refundable and does not protect you.

For investment borrowing, LMI becomes expensive above 80 per cent LVR. Some lenders offer products up to 90 or 95 per cent LVR for investment purposes, but the premium can add tens of thousands of dollars to your upfront costs. If you can structure your borrowing to stay at or below 80 per cent LVR, you avoid LMI entirely.

LMI is typically capitalised into the loan, meaning you pay interest on the premium over the life of the loan. If you are close to the 80 per cent threshold, a small increase in deposit or a reduction in purchase price can eliminate the premium and reduce your total borrowing cost.

Cross-Collateralisation and Loan Structure

When you use equity from your home to fund an investment property, you can structure the lending in two ways. The first is to cross-collateralise both properties under a single facility. The second is to keep the loans separate with each property securing its own debt.

Cross-collateralisation allows you to borrow more and may reduce application costs, but it locks both properties together. If you want to sell one property or refinance in future, you need the lender's consent and may need to revalue both properties. This reduces flexibility and can delay transactions.

Keeping the loans separate means each property has its own loan secured only against that property. This structure gives you more control when selling or refinancing and makes it simpler to manage your portfolio as it grows. Most brokers recommend separate loans unless cross-collateralisation is necessary to meet serviceability or LVR requirements.

Tax Deductibility and Claimable Expenses

Interest on borrowings used to acquire or hold a rental property is deductible against rental income. Interest on borrowings for private purposes is not deductible, even if the loan is secured against an investment property.

If you refinance your home to release equity and use part of the funds for the investment property and part for personal expenses, only the portion used for investment purposes is deductible. Lenders and accountants recommend splitting the loan into separate accounts at the time of drawdown to maintain clear records.

Other claimable expenses include council rates, water charges, landlord insurance, property management fees, repairs and maintenance, and depreciation on building and plant. Stamp duty and borrowing costs are not immediately deductible but can be amortised over five years. Keep records of all expenses and consult a licensed tax adviser to confirm your deductions before lodging your return.

Call one of our team or book an appointment at a time that works for you to discuss investment loan options suited to your property and income position.

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