⏱ Estimated reading time: 18 min read
Buying an investment property doesn’t always mean spending years saving for another deposit.
If you already own a home, you may have built up equity that could help fund your next property purchase. For some Australian investors, accessing this equity can provide an alternative to using cash savings.
But is using equity better than paying a deposit from your savings?
The answer depends on your existing mortgage, available funds, borrowing capacity and longer term investment plans.
Using savings generally means taking on less debt. Using equity may allow you to retain cash for other purposes, but it usually involves additional borrowing secured against an existing property.
Both approaches have advantages and risks.
For example, an investor with $200,000 in savings might be able to fund a deposit without increasing the mortgage on their family home.
Another investor might have only $30,000 in savings but own a property worth considerably more than their outstanding mortgage. They may be able to access part of that equity to support a new purchase.
Understanding how these funding options work can help you choose an arrangement that suits your financial circumstances.
In this guide, we’ll explain the difference between an investment property deposit and usable equity, how to calculate the funds available, and what to consider when structuring the borrowing.
What Is the Difference Between a Deposit and Usable Equity?
An investment property deposit is the portion of the purchase price that you contribute rather than borrowing through the main loan secured against the new property.
Usable equity is the amount you may be able to borrow against an existing property, subject to lender approval.
The important distinction is where the money comes from.
A cash deposit generally comes from savings or other funds you already own.
An equity funded deposit generally comes from an additional loan secured against property.
This means using equity doesn’t eliminate the deposit requirement. It changes how you fund that requirement.
Investment Property Deposit vs Usable Equity at a Glance
| Feature | Cash deposit | Usable equity |
|---|---|---|
| Funding source | Existing savings | Additional property secured borrowing |
| Additional debt required for deposit | No | Generally yes |
| Impact on savings | Reduces available cash | May preserve savings |
| Interest on deposit funding | None if funded entirely from savings | Interest generally applies |
| Existing property used as security | Not necessarily | Yes |
| Lender approval for funding | Purchase loan assessment | Equity release and purchase loan assessment |
| Main consideration | Available cash after settlement | Total debt and repayment commitments |
Neither option is automatically more suitable.
The decision should consider the complete borrowing arrangement, not simply the amount needed on settlement day.
How Much Deposit Do You Need for an Investment Property?
Many Australian investors aim for a deposit equal to 20% of the property’s purchase price.
A 20% deposit generally results in an 80% loan to value ratio, commonly called LVR.
This can help avoid lenders mortgage insurance and may provide access to a wider range of loan products.
However, some lenders offer investment property loans with smaller deposits.
Eligibility depends on lender policy, income, existing debts, property type and other credit requirements.
Example: Deposit Requirements for an $800,000 Property
| Deposit percentage | Deposit required | Main purchase loan |
|---|---|---|
| 10% | $80,000 | $720,000 |
| 15% | $120,000 | $680,000 |
| 20% | $160,000 | $640,000 |
| 25% | $200,000 | $600,000 |
These figures exclude purchasing expenses and any applicable lenders mortgage insurance.
A smaller deposit generally means a larger mortgage and potentially higher interest costs over time.
It may also affect which lenders and loan products are available.
What Other Costs Do You Need to Fund?
The deposit is only one part of the upfront funding requirement.
Investment property buyers should also consider:
- Stamp duty or transfer duty
- Conveyancing and legal expenses
- Building and pest inspections
- Government registration fees
- Loan establishment and settlement charges
- Lenders mortgage insurance, where applicable
- Property related settlement adjustments
Costs vary according to property value, location and transaction details.
For example, stamp duty on an investment property in New South Wales may differ from the duty payable on a similar property in Queensland or Victoria.
Before applying for finance, calculate the full amount required to complete the purchase.
This will help establish whether your savings are sufficient or whether additional funding may be needed.
What Is Equity in Your Home?
Equity is the difference between the current value of a property and the amount outstanding on the mortgage.
It can increase as you make principal repayments or if the property’s market value rises.
It can also decrease if property values fall or the amount borrowed increases.
Example: Calculating Home Equity
Imagine you own a home valued at $1,000,000.
Your outstanding mortgage balance is $500,000.
| Item | Amount |
|---|---|
| Current property value | $1,000,000 |
| Outstanding mortgage | $500,000 |
| Total equity | $500,000 |
You have $500,000 in equity.
However, that doesn’t mean the bank will automatically allow you to borrow another $500,000.
Lenders generally apply limits to the amount of debt secured against a property.
This is why it’s important to distinguish between total equity and usable equity.
What Is Usable Equity and How Do You Calculate It?
Usable equity is the portion of your property’s equity that may be available for additional borrowing.
A common starting point is to calculate 80% of the property’s lender accepted value and subtract the existing debt secured against it.
Usable equity = (Property value × 80%) − Existing mortgage balance
Using our previous example:
Property value: $1,000,000
80% of property value: $800,000
Outstanding mortgage: $500,000
Indicative usable equity: $300,000
Although the homeowner has $500,000 in total equity, the indicative usable equity at 80% LVR is $300,000.
This approach is commonly used as an initial estimate, but the amount actually available depends on the lender’s valuation, credit policy and your ability to repay additional borrowing.
Some lenders may consider higher LVR arrangements, although additional requirements and costs may apply.
Usable Equity Examples
| Property value | Mortgage owing | Total equity | Indicative usable equity at 80% LVR |
|---|---|---|---|
| $700,000 | $350,000 | $350,000 | $210,000 |
| $900,000 | $550,000 | $350,000 | $170,000 |
| $1,000,000 | $500,000 | $500,000 | $300,000 |
| $1,200,000 | $700,000 | $500,000 | $260,000 |
These calculations are illustrative and don’t represent guaranteed lending limits.
Why the Bank’s Property Valuation Matters
Your estimate of your home’s value may differ from the valuation accepted by the lender.
Suppose you believe your home is worth $1 million.
Based on that estimate, your usable equity might appear to be $300,000.
However, if the lender values the property at $950,000, the calculation changes.
80% of $950,000 is $760,000.
After subtracting the $500,000 mortgage, indicative usable equity becomes $260,000.
That’s $40,000 less than your original estimate.
A current lender valuation is therefore an important step when investigating equity funded purchases.
Example 1: Buying an Investment Property Using Cash Savings
Let’s consider an investor purchasing an $800,000 property.
They have $250,000 in savings and want to borrow 80% of the purchase price.
Their funding arrangement might look like this.
| Funding component | Amount |
|---|---|
| Investment property purchase price | $800,000 |
| Cash deposit | $160,000 |
| Illustrative purchase costs | $40,000 |
| Total cash required | $200,000 |
| Main investment property loan | $640,000 |
| Savings remaining | $50,000 |
The $40,000 purchase cost allowance is hypothetical. Actual costs must be calculated for the property and jurisdiction.
In this example, the investor uses existing savings to fund the deposit and purchasing expenses.
They don’t need to borrow against another property to complete the deposit.
The main advantage is that the deposit doesn’t create an additional interest bearing loan.
However, the investor has reduced their accessible savings from $250,000 to $50,000.
They should consider whether the remaining funds are sufficient for personal emergencies, vacancies and unexpected property expenses.
Example 2: Buying the Same Property Using Usable Equity
Now consider another investor purchasing the same $800,000 property.
They own a family home valued at $1 million with a $500,000 mortgage.
Their indicative usable equity at 80% LVR is $300,000.
They want to access $200,000 to fund the investment property deposit and illustrative purchase costs.
Their borrowing arrangement could look like this.
| Loan component | Amount |
|---|---|
| Existing home mortgage | $500,000 |
| Additional equity loan | $200,000 |
| New investment property purchase loan | $640,000 |
| Total mortgage debt | $1,340,000 |
The investor has acquired the $800,000 investment property without contributing the $200,000 from existing cash savings.
However, they’ve taken on $840,000 in additional borrowing.
This includes the $200,000 equity loan and the $640,000 investment purchase loan.
That’s the most important distinction between the two examples.
Using equity can reduce the cash required to complete a purchase, but it doesn’t reduce the amount borrowed.
In fact, if the deposit and purchasing expenses are fully funded by borrowing, the total new debt may exceed the property’s purchase price.
The investor must consider repayments on both new facilities.
How Much Does Using Equity Cost?
Equity isn’t free money.
When you access usable equity through a loan, interest generally applies to the additional borrowing.
For example, suppose you release $200,000 in equity at an illustrative interest rate of 6%.
The interest cost on that amount alone would initially be approximately $12,000 annually if the full balance remained outstanding.
That’s $1,000 per month before any principal repayments, fees or rate changes.
If the investor also has a $640,000 purchase loan, both facilities contribute to the overall financing costs.
This doesn’t necessarily mean using equity is the wrong decision.
Preserving cash may be valuable for investors who want to maintain financial reserves.
But the comparison should account for the interest expense associated with the additional borrowing.
It shouldn’t be based only on how much money remains in your bank account after settlement.
How Can You Access Equity to Buy an Investment Property?
There are several ways homeowners may be able to access equity.
The available arrangements depend on the lender, existing mortgage and proposed investment purchase.
1. Increase Your Existing Home Loan
One approach is to apply for a home loan increase, sometimes called a top up.
For example, a homeowner with a $400,000 mortgage might apply to increase the borrowing by $150,000.
If approved, the additional amount could be used towards an investment purchase.
However, increasing the existing loan also increases the overall debt secured against the home.
You should consider whether combining different borrowing purposes in one facility is appropriate.
2. Establish a Separate Loan Split
Another approach is to create a separate loan facility against the existing property.
For example:
Loan A: $400,000 existing owner occupied mortgage.
Loan B: $150,000 equity release for the investment property.
Separate loan splits can help keep borrowing purposes identifiable.
They may also offer flexibility when managing repayments, refinancing or reviewing the investment loan.
However, features and repayment arrangements depend on the lender and product.
3. Refinance to Access Equity
Some homeowners refinance their existing mortgage to another lender while applying for additional funds.
This may be considered when the current lender’s products, rates or policies don’t suit the proposed purchase.
Refinancing can involve discharge fees, establishment costs, valuation requirements and other expenses.
The existing loan may also have fixed rate break costs.
A refinance should therefore be assessed based on the total financial outcome, not simply the advertised interest rate.
You can explore NMC Finance’s property investor loan solutions to understand how different lending arrangements may support your investment plans.
What Is Cross Collateralisation?
Cross collateralisation occurs when multiple properties are used as security for related borrowing arrangements.
For example, a lender may use your family home and new investment property as security for an investment loan.
This can sometimes help facilitate a purchase, but it can also create additional complexity.
Suppose you later decide to sell the investment property while keeping your family home.
The lender may need to review the remaining securities, outstanding debt and loan arrangements before releasing the property being sold.
Similarly, refinancing one property independently may become more difficult.
Some investors prefer separate security arrangements because they can provide greater flexibility.
However, the most appropriate structure depends on the lender’s requirements and the borrower’s circumstances.
Before agreeing to cross collateralisation, understand which properties secure each loan and what would happen if you wanted to sell or refinance.
Can You Combine Savings and Equity for an Investment Property Deposit?
Yes, subject to lender approval.
You don’t necessarily need to fund the entire deposit from one source.
Some investors use a combination of savings and additional equity borrowing.
For example, suppose you need $200,000 for an investment property deposit and purchasing expenses.
You might contribute $80,000 from savings and borrow $120,000 against your existing property.
| Funding source | Amount |
|---|---|
| Cash savings | $80,000 |
| Equity release | $120,000 |
| Total funds available | $200,000 |
This arrangement could allow the investor to retain some savings while borrowing less against the existing property than they would under a fully equity funded approach.
However, it still creates an additional loan obligation.
The balance between cash and equity should reflect your existing commitments, savings requirements and longer term objectives.
Does Using Equity Affect Your Existing Home Loan?
It can.
When you release equity, you’re generally increasing the debt secured against your existing property.
That may increase repayments or create a separate repayment obligation.
It may also affect your ability to refinance or borrow for other purposes in the future.
For example, someone planning to renovate their family home might want to consider whether using a large portion of available equity for an investment property would reduce future borrowing flexibility.
Likewise, homeowners considering another property purchase should understand the implications for their total debt.
Using equity should be considered alongside your broader financial plans rather than as an isolated transaction.
Does Having Usable Equity Guarantee Investment Loan Approval?
No.
Having substantial equity doesn’t automatically mean you can obtain additional finance.
Lenders assess whether you can meet the repayment obligations.
Your income, existing mortgages, other liabilities, living expenses and expected rental income may all influence the outcome.
For example, a homeowner might have $350,000 in usable equity but limited assessable income.
They may have sufficient property security yet be unable to satisfy the lender’s repayment requirements.
Another borrower might have strong income but insufficient equity to fund their preferred purchase.
Both the security and repayment assessments need to be satisfied.
For a detailed explanation, read How Lenders Assess Investment Loan Serviceability.
Is It Better to Use Savings or Equity?
The better option depends on your financial position.
Using cash savings may be more attractive if you have substantial funds available and want to minimise additional borrowing.
Using equity may be worth exploring if you own a property with sufficient available equity and want to retain cash savings.
A combination may also be suitable.
Consider these factors before deciding.
Your existing debt
If you already have significant mortgage commitments, additional equity borrowing could increase financial pressure.
Your available savings
Using most of your cash for a deposit may leave limited financial reserves.
Your longer term plans
If you intend to buy further properties, your initial borrowing structure may affect future options.
Your preferred financial flexibility
Different loan arrangements can influence refinancing, repayments and access to funds.
Your comfort with risk
Using equity means your existing property is involved in supporting additional borrowing.
The decision shouldn’t be based solely on which option allows you to purchase sooner.
It should reflect how the funding arrangement fits your overall financial position.
Tax Considerations When Using Equity
The way borrowed funds are used can affect the tax treatment of interest expenses.
For example, money borrowed against your existing home and used for an income producing investment property may be treated differently from money borrowed for private expenditure.
The security property alone doesn’t determine whether interest is deductible.
The purpose and use of the borrowed funds are important.
This is one reason separate loan facilities may be useful for record keeping.
However, simply creating a separate investment loan doesn’t automatically establish tax deductibility.
Investors should also be cautious when mixing personal and investment borrowing or withdrawing money through redraw facilities.
The tax treatment can become complicated when borrowed funds are used for several purposes.
Australian taxation rules, including those affecting negatively geared investments, can also change.
Before choosing a loan structure based on expected deductions, seek advice from a qualified tax professional using current legislation.
What Are the Risks of Using Equity to Buy Another Property?
Using equity increases your exposure to property related debt.
There are several risks worth considering.
Property Values Can Fall
If property values decline, the equity available in your properties may decrease.
This can affect refinancing options and your ability to access additional borrowing.
Interest Rates Can Increase
Variable interest rate movements may affect both your equity loan and the new investment mortgage.
Higher rates can increase the overall repayment commitment.
Your Existing Home May Be at Risk
When your family home secures additional borrowing, repayment difficulties may have consequences for that property.
This is an important consideration when deciding how much equity to use.
Rental Income Isn’t Guaranteed
An investment property may experience vacancies or changes in rental demand.
The loan obligations generally continue even when rental income is interrupted.
Future Borrowing May Become More Difficult
Additional debt can reduce your capacity to obtain finance for renovations, another property or other purposes.
Before proceeding, consider how the purchase would affect your financial flexibility under less favourable circumstances.
Five Mistakes to Avoid When Funding an Investment Property
1. Confusing total equity with usable equity
The difference between property value and mortgage balance isn’t necessarily the amount available to borrow.
2. Forgetting purchase expenses
The deposit alone may not cover all the funds required for settlement.
3. Ignoring the cost of equity borrowing
An equity funded deposit generally creates interest expenses and repayment obligations.
4. Combining loans without understanding the structure
Mixed borrowing purposes and shared securities can complicate future loan management.
5. Using all available funds
Whether you’re using cash or equity, consider how much financial flexibility will remain after the purchase.
Avoiding these mistakes can help you approach the financing decision with a clearer understanding of the costs and risks.
How to Prepare for an Equity Funded Investment Purchase
If you’re considering using equity, start by gathering information about your existing property and mortgage.
You should know the approximate current property value, outstanding loan balance, repayment amount and loan features.
Next, establish the amount required for the new purchase.
Include the deposit and transaction costs.
Then compare several possible funding arrangements.
For example, you could examine a purchase funded entirely from savings, one funded through equity and another using a combination.
For each scenario, consider the additional debt, repayments, cash remaining after settlement and effect on future borrowing flexibility.
It’s also worth obtaining an indicative assessment before making a purchase commitment.
This can help you understand whether the proposed funding structure may be available.
For a broader assessment of purchase readiness, see Can I Afford an Investment Property? A Finance Readiness Guide.
Frequently Asked Questions
Can I Use Equity in My Home as a Deposit for an Investment Property?
Potentially. A lender may allow you to borrow against usable equity in your existing property to fund an investment deposit and purchasing expenses, subject to valuation, borrowing capacity and credit approval.
How Much Usable Equity Do I Need to Buy an Investment Property?
The amount depends on the purchase price, deposit requirement, transaction costs and other available funds. You may be able to combine savings and equity rather than funding the entire deposit through additional borrowing.
Can I Buy an Investment Property Without Cash Savings?
It may be possible where sufficient equity and borrowing capacity are available. However, using equity normally creates additional debt, and retaining some accessible cash for emergencies is an important consideration.
Is Using Equity the Same as Using Savings?
No. Savings are funds you already own. Accessing equity generally requires additional borrowing secured against an existing property.
Can I Use Equity If I Still Have a Mortgage?
Potentially. You don’t need to own your home outright. The amount available depends on the property’s lender accepted value, existing debt, lender policy and your repayment capacity.
Does Using Equity Mean I Need Two Loans?
Not always. The arrangement may involve a loan increase, separate split, refinance or another approved structure. Some purchases involve an equity loan and a separate investment property purchase loan.
Is Interest on an Equity Loan Tax Deductible?
It may be, depending on how the borrowed funds are used and the applicable tax rules. The security property alone doesn’t determine deductibility. Obtain advice from a qualified tax professional.
Should I Use All My Available Equity?
Not necessarily. Borrowing more increases financial commitments and risk. Keeping some capacity and accessible savings may provide flexibility if circumstances change.
Understand Your Investment Property Funding Options with NMC Finance
Funding an investment property involves more than finding the deposit.
The way you use savings, access equity and structure the borrowing can affect your repayments, financial flexibility and future investment plans.
At NMC Finance, we help Australian property investors understand their available funding options and compare suitable loan arrangements.
Our team can help you review your existing mortgage, estimate usable equity, consider deposit requirements and understand how different loan structures may fit your circumstances.
With more than 20 years of finance experience, we take the time to understand what you’re trying to achieve rather than focusing only on the amount you may be able to borrow.
Whether you’re purchasing your first investment property, using equity from your family home or planning to expand an existing portfolio, understanding your finance options is an important starting point.
Considering using savings or equity for your next investment property?
Explore our Property Investor Loans page to learn more about your options and arrange a conversation with NMC Finance.
Disclaimer: This article provides general information only and does not constitute personal financial, investment, legal or taxation advice. All figures are illustrative. Finance is subject to lender criteria and approval. Seek appropriate professional advice before making borrowing or investment decisions.
