Understanding the basics of using equity to buy another property

What equity release means for property investors

Equity release lets you borrow against the value in a property you already own to fund a deposit on another property. Most lenders will allow you to borrow up to 80 per cent of your property's value without incurring Lenders Mortgage Insurance, which means if your home is worth $600,000 and you owe $300,000, you have access to roughly $180,000 in usable equity.

Consider a buyer who purchased a house in Glenelg three years back for $520,000 with a 10 per cent deposit. Property values in the area have increased, and the home is now valued at $610,000. The outstanding loan sits at $440,000. At 80 per cent LVR, the borrower can access $488,000 in total lending, which leaves $48,000 in available equity after repaying the existing debt. That amount covers a deposit and purchase costs on a second property valued around $240,000 in a regional location or outer suburb, without the borrower needing to save again from scratch.

Equity release works when the first property has appreciated or the loan balance has been paid down enough to create a buffer. It doesn't work if the property has lost value or if your income can't service both loans. Lenders assess your capacity to service the combined debt using a buffer of at least 3.0 percentage points above the current rate, and they apply debt-to-income limits that cap total borrowing at six times your income for 80 per cent of new investor loans.

How lenders assess equity when you apply for a second property loan

Lenders order a valuation on your existing property to determine how much equity you hold. They calculate the loan-to-value ratio by dividing the total amount you want to borrow across both properties by the total value of both properties. If the resulting LVR is above 80 per cent, you'll pay LMI on the additional lending.

Serviceability is assessed across both properties. Lenders use your rental income from the existing property at a shading rate, usually 80 per cent, to account for vacancy and management costs. They add rental income from the second property, also shaded, and deduct the interest cost on both loans plus your personal living expenses and existing rent. If you're planning to buy an investment property in Adelaide's growth corridors such as Salisbury or Playford, lenders may apply additional scrutiny to rental assumptions if the area has higher vacancy rates or lower historical rental yields.

Debt-to-income limits introduced in February this year mean most lenders can only write 20 per cent of their new investor loans to borrowers with total debt above six times their gross income. If you earn $90,000 and already owe $480,000, your total borrowing capacity may be capped near $540,000 unless you fall within the lender's exception quota. Some lenders are more conservative and apply their own overlays below the regulatory ceiling.

Interest rates and loan structure for equity release

Investment property rates sit higher than owner-occupier rates at most lenders. The gap is typically between 0.30 and 0.70 percentage points depending on whether you choose principal and interest or interest-only repayments. Interest-only loans are common in this scenario because they lower the monthly cash flow requirement and preserve borrowing capacity for future purchases.

Fixed and variable rate options are both available. Some investors split their loan so part of the debt is fixed and part remains variable, which offers partial certainty on repayments while retaining flexibility to make extra repayments or access an offset account on the variable portion. Fixed rates on investment loans typically don't include offset accounts, and break costs apply if you exit the fixed term early.

Lenders assess interest-only applications more strictly than principal and interest. APRA's capital framework assigns higher risk weights to interest-only investment loans, which flows through to pricing. Interest-only periods are typically approved for five years, after which the loan reverts to principal and interest unless you reapply and meet serviceability at that time.

Tax treatment of equity release for investment purposes

Interest on borrowings used to purchase an investment property is deductible against your rental income. If you release equity from your existing property and use those funds as a deposit on a second investment property, the interest on that additional borrowing is also deductible, provided the funds are used for income-producing purposes.

If you use released equity for private purposes such as renovating your own home or buying a car, the interest on that portion is not deductible. Lenders don't police how you use the funds, but the ATO does. Keep records showing the funds were applied directly to the investment property purchase, including settlement statements and trust account transfers.

For properties purchased after 12 May this year, negative gearing losses can only be offset against income from other residential properties, not against your salary. Properties purchased before that date, or those under contract at 7:30pm on 12 May, remain fully deductible against all income. Eligible new build properties purchased after that date also retain full negative gearing treatment. The rules change from the 2027-28 income year, so properties acquired between May and June next year have limited time under the old deduction rules.

What happens if rental income doesn't cover both loans

Most investors using equity to fund a second property run a negative cash flow position, at least initially. The rental income from both properties, even after shading, typically doesn't cover the combined loan repayments, property management fees, insurance, and rates. The shortfall is funded from your salary or other income.

Lenders require proof that your income can sustain that shortfall over time. They stress-test the scenario by adding the serviceability buffer to the loan rate and assuming rental income at 80 per cent or less. If your income doesn't cover the gap at those assumptions, the loan won't be approved regardless of how much equity you hold.

In Adelaide, rental yields in the northern suburbs tend to be higher than in prestige coastal areas, which can improve cash flow on a second property. A unit in Elizabeth or Davoren Park might return a 6 per cent gross yield, compared to 3.5 per cent for a house in Unley. The trade-off is capital growth expectations and tenant profile. Structuring the loan as interest-only reduces the monthly commitment, but it doesn't eliminate the shortfall if the yield is too low relative to the interest rate.

Structuring loans to preserve future borrowing capacity

Cross-collateralisation is when a lender takes security over multiple properties under a single loan facility. It can speed up approvals and reduce documentation, but it locks both properties to one lender and limits your ability to refinance or sell one property independently. Most brokers recommend standalone loans on separate properties where possible.

Using offset accounts on investment loans can reduce the interest you pay, but it also reduces your tax deductions because the interest expense is lower. Offset balances don't reduce the loan amount for LVR purposes under APRA's capital rules, so they don't help you borrow more. If your priority is to grow a portfolio, keeping cash in offset accounts on non-deductible debt such as an owner-occupier loan or holding it as accessible savings for the next deposit usually makes more sense.

Debt-to-income limits apply at a portfolio level, so every dollar you borrow now reduces what you can borrow later. Structuring the second loan with a longer interest-only period and choosing a lender with higher serviceability buffers or more flexible DTI policies can leave room for a third purchase down the track. Not all lenders assess rental income the same way, and some allow higher shading or accept contract rental income on new purchases where others require three months of bank statements showing the rent has been received.

How the process works from application to settlement

You start by requesting a valuation on your existing property, either through your broker or directly with the lender. Some lenders offer desktop or automated valuations at no cost if the property is in a metropolitan area with strong sales data. If a full valuation is required, the cost is usually between $200 and $600 depending on property type and location.

Once equity is confirmed, you apply for pre-approval on the second property loan. The lender assesses your income, existing debts, credit history, and serviceability across both properties. Pre-approval is conditional and subject to valuation on the property you intend to purchase. Most pre-approvals are valid for three to six months.

After you sign a contract on the second property, you submit the contract to the lender for formal approval. The lender orders a valuation on the new property and reviews the contract terms. If the valuation comes in below the purchase price, the lender may reduce the approved loan amount, which means you'll need additional funds to settle. If you're purchasing in an area with limited sales data or high unit density such as Mawson Lakes or Lightsview, valuation risk is higher.

Settlement usually occurs within 30 to 90 days depending on the contract terms. The lender transfers funds to your solicitor's trust account, and the solicitor completes the purchase. If you're refinancing the first property at the same time to release equity, both settlements may need to occur on the same day, which requires careful coordination between lenders and solicitors.

Call one of our team or book an appointment at a time that works for you. We work with investors across Adelaide who are building portfolios using equity, and we can walk through your scenario including serviceability, lender selection, and structure before you commit to a purchase.

Frequently Asked Questions