The Pros and Cons of Using Equity to Buy Investment Property

Using Your Home Equity as an Investment Deposit

Home equity lets you access the value built up in your existing property to fund a deposit on an investment property without needing to save cash separately. Most lenders will allow you to borrow up to 80 per cent of your home's value, meaning if your property is worth $600,000 and you owe $300,000, you could access up to $180,000 in usable equity. That amount can cover a deposit, stamp duty, and other settlement costs on a second property.

The appeal is immediate. You can move on a property without waiting years to accumulate savings, and you retain the capital growth potential of both properties. For residents in Midland, where the median house price has grown steadily over recent years alongside major infrastructure investment including the Midland Health Campus expansion and the Midland Train Station redevelopment, tapping into that growth to fund a second purchase makes sense for many households.

But equity-based investment comes with constraints that cash deposits do not. Your borrowing capacity is assessed across both loans, and recent changes to lending rules mean lenders are now more cautious about how much total debt they will approve relative to your income. Understanding both the advantages and the limitations will help you decide whether this strategy fits your circumstances.

The Advantages of Leveraging Equity

Using equity means you can act quickly when an opportunity arises. You do not need to liquidate savings, and your existing home remains intact as your primary residence. You also benefit from compounding growth across two properties rather than one, which can accelerate wealth building over time.

Consider a household in Midland with $200,000 in usable equity. They use that to purchase a rental property and structure the loan as interest-only to keep repayments lower during the early years. Rental income covers a portion of the mortgage, and they continue living in their home without disruption. Over time, both properties appreciate, and they eventually refinance or sell to access further capital.

Another advantage is tax treatment. Interest on the investment loan is generally deductible against rental income, which reduces the after-tax cost of borrowing. However, from 1 July 2027, new rules will quarantine rental losses on most investment properties acquired after May 2026, meaning you cannot offset those losses against your salary unless the property qualifies as an eligible new build. Properties you already own or have under contract before that date are not affected.

The Risks and Constraints You Need to Know

Equity-based investment increases your total debt, and that debt is secured against your home. If rental income falls short or interest rates rise, you are responsible for covering the gap from your own income. Lenders also apply a serviceability buffer when assessing your application, meaning they test whether you could still afford repayments if rates increased by three percentage points.

From February 2026, a debt-to-income cap applies to new lending. Lenders can only approve a limited proportion of loans where total debt exceeds six times your gross annual income. If your household earns $120,000 per year, that cap sits at $720,000 in total borrowing. If your existing home loan is $400,000 and you want to borrow another $350,000 for an investment property, you exceed the threshold, and approval becomes harder to secure.

Another risk is property-specific. If you purchase an established dwelling and rental demand softens, vacancy periods can leave you covering both the investment loan and your home loan simultaneously. Midland has seen strong demand driven by its affordability relative to inner suburbs and proximity to employment hubs, but vacancy rates can still fluctuate with economic conditions.

How Lenders Assess Investment Loans Using Equity

Lenders assess your total debt position, not just the new loan. They will calculate your net equity, confirm your property valuation, and review your income, expenses, and existing commitments. Most lenders also discount rental income by 20 per cent to account for vacancy and management costs, so if your property generates $600 per week in rent, they will only credit $480 per week when assessing serviceability.

If you are borrowing above 80 per cent of the property value, you will pay Lenders Mortgage Insurance, which can add thousands of dollars to your upfront costs. Structuring the loan to keep your loan-to-value ratio at or below 80 per cent avoids this cost and generally secures better interest rates.

Some lenders also differentiate between owner-occupier and investor lending in their credit policies. Investor interest rates are typically higher, and rate discounts are less generous. If you are refinancing your home loan at the same time to release equity, comparing investment loan options across multiple lenders can make a material difference to your repayments and approval outcome.

Interest-Only Versus Principal and Interest for Investment Loans

Interest-only repayments are common for investment loans because they reduce the monthly cost and maximise the amount of deductible interest. If your loan amount is $400,000 at a variable rate, an interest-only repayment might be around $2,000 per month, compared to $2,600 per month for principal and interest. That difference can make the property cash-flow neutral or even positive, depending on rental income.

But interest-only periods are temporary, usually five years, and when they end, repayments increase sharply as you begin paying down the principal over the remaining loan term. If you have not planned for that increase, it can strain your budget. Lenders also assess your ability to service principal and interest repayments from the start, even if you elect interest-only initially.

Some investors prefer principal and interest from the outset because it builds equity in the investment property and reduces total interest paid over time. This approach works well if you have surplus income and are focused on long-term wealth building rather than short-term cash flow.

Negative Gearing and the Changes Coming in 2027

Negative gearing allows you to offset rental losses against other income, reducing your taxable income and lowering your overall tax bill. If your investment property costs $30,000 per year to hold and generates $25,000 in rent, the $5,000 loss can be deducted from your salary, potentially saving you $1,500 to $2,500 in tax depending on your marginal rate.

From 1 July 2027, this changes for most properties acquired after May 2026. Rental losses will be quarantined, meaning they can only be offset against other residential rental income or carried forward to offset future gains when you sell. You will not be able to claim those losses against salary or wages. Properties purchased before that date continue under the current rules, and eligible new builds remain fully negatively gearable even after the change.

This affects investment strategy. If you are considering using equity to purchase an established property in Midland or surrounding suburbs, the loss of immediate tax relief increases the cost of holding the property, and you will need stronger rental income or a longer investment horizon to make the numbers work. Alternatively, targeting new builds may provide better tax treatment, though supply of new stock in Midland is limited compared to greenfield areas further out.

When Equity Release Makes Sense and When It Does Not

Equity release works well when you have stable income, a clear investment goal, and enough buffer to manage higher debt. It suits households who want to build a property portfolio without waiting years to save, and who are comfortable with the additional financial commitment.

It does not suit everyone. If your income is variable, your existing loan repayments are already stretching your budget, or you are approaching retirement, taking on more debt secured against your home increases risk without enough upside. Similarly, if property prices in your target area are flat or falling, the investment case weakens.

For Midland residents, the local market has performed well due to affordability and infrastructure investment, but timing still matters. Purchasing during a peak without considering rental yield and holding costs can erode returns, even with equity funding the deposit. Speak with someone who can model your specific scenario, including repayments, rental income, and tax treatment under the new rules, before committing.

Refinancing Your Investment Loan After Purchase

Once your investment property is established and generating rental income, refinancing the loan can improve your rate, access better features, or release further equity if the property has increased in value. Many investors refinance every few years to ensure they are not paying more than necessary and to take advantage of competitive offers.

Refinancing also allows you to consolidate debt or restructure your loans to align with changing goals. If your income has increased or your home loan has reduced, you may be able to access additional equity to fund a third property or other investments. However, the same serviceability tests and debt-to-income caps apply, so your ability to refinance depends on your overall financial position at the time.

Call one of our team or book an appointment at a time that works for you. We will assess your equity position, compare investment loan products across lenders, and structure the finance to suit your goals and circumstances.

Frequently Asked Questions