The Great Australian Dream 2.0: Should you use your home equity to buy an investment property?
The backyard barbecue conversation in Australia inevitably turns to property. It’s a national obsession. And for homeowners who’ve been diligently paying down their mortgage while watching their property value climb, a tantalising question often bubbles up: "Should I use this equity to buy an investment property?"
For many people, buying an investment property feels like the next logical step in building wealth. The family home is often seen as the heart of the Great Australian Dream, and it can also be a starting point for growing a property portfolio. If you’ve built up this valuable asset, it makes sense to consider putting it to work.
Using your home equity to invest can be a strong strategy and has helped many people build wealth. However, it also means your home is at risk, and your finances become more connected to the ups and downs of the property market. This guide will explain the steps, numbers, risks, and rewards of using your equity in today’s Australian market.
Before you can use your equity, you need to understand what it is and, crucially, how much you can actually touch.
Think of equity as the portion of your home you truly own. It’s the difference between your property’s current market value and the amount you still owe on your mortgage.
Equity = Current Property Value - Outstanding Mortgage Balance
For example, if your home in the suburbs of Adelaide is now worth $800,000 and you have $300,000 left on your mortgage, you have $500,000 in equity.
But here’s the catch: you can’t access all of it. Banks need a safety buffer. They use a metric called the Loan-to-Value Ratio (LVR), which is the percentage of the property’s value they’re willing to lend against. For most Australian lenders, the maximum LVR for investment purposes is around 80% and as high as 95%, but you’ll be on the hook for expensive Lenders Mortgage Insurance (LMI).
Let’s run the numbers on that Adelaide home:
- Property Value: $800,000
- 80% LVR Threshold: $640,000
- Current Loan: $300,000
- Accessible Equity: $640,000 - $300,000 = $340,000
This $340,000 is the amount you could potentially borrow to use as a deposit and cover the purchasing costs (like stamp duty) for an investment property.
How to unlock your equity: The nuts and bolts
Accessing your equity isn’t as simple as withdrawing cash from an ATM. There are several common methods, each with its own set of advantages and disadvantages.
- Refinancing: This involves replacing your current home loan with a new, larger one. You borrow enough to pay off your existing mortgage and have the extra equity released to you as a lump sum or into a separate loan split. This can be a good opportunity to secure a lower interest rate, but it comes with the usual costs associated with setting up a new loan.
- Home Equity Loan or Line of Credit: This is essentially a second loan taken out against your property. A standard home equity loan gives you a lump sum, while a line of credit acts like a giant credit card with your home as security. Lines of credit offer great flexibility—you only draw down what you need and only pay interest on that amount. However, they often come with variable interest rates, which can be a trap for those who are undisciplined.
The Numbers Game: Will your investment pay for itself?
Buying an investment property is a business decision. The numbers have to work. Two of the biggest factors influencing your success are rental yield and interest rates.
What Rental Yield Do You Need?
For an investment property to be cash-flow positive, the rent must cover all the outgoings, including mortgage repayments, council rates, insurance, maintenance, and property management fees. The key metric here is the net rental yield.
Gross yield is calculated by dividing the annual rent by the property’s value. Net yield, which subtracts all your expenses, shows whether you will have money left over each month. Many Australian properties are considered cash-flow positive when the net rental yield is about 5% or higher.
For a $500,000 investment property, a 5% net yield means you’d need $25,000 in rental income after all expenses are paid. Getting this right is the difference between an asset that pays you and one that drains your personal savings.
The interest rate squeeze
The interest rate environment has been a rollercoaster for Aussie investors. The rapid RBA cash rate hikes that began in 2022 significantly squeezed landlord profits, pushing up holding costs for those with variable-rate loans.
In 2025, things have changed. The RBA has lowered the cash rate to 3.60%, so borrowing is now cheaper. You can view various options for Investment property loan rates is making it easier to enter the market. If rates drop further, more people may want to buy, which could push prices up. While lower rates help with borrowing, they can also make the market more competitive and drive up property prices.
Structuring for success: Protecting your assets and your sanity
How you structure your loans and ownership can have a massive impact on your risk exposure and tax outcomes. Don’t just sign on the dotted line without thinking this through.
Loan Structure: cross-collateralisation vs. standalone
When you use your equity, your lender might suggest cross-collateralisation, which links your home and your new investment property as security for the whole loan. This can seem easier and may let you borrow more, but it also increases your risk. If one property loses value or you have trouble with a loan, the bank can reassess your entire portfolio. Selling one property also becomes more difficult because the bank controls the process.
A different approach is to keep your home loan separate and take out a new loan for the investment property, using your equity as the deposit. This keeps your assets separate, giving you more flexibility and control. Many experienced investors prefer this structure.
Ownership structure: your name or a trust?
Most people buy property in their own name. It’s simple. But for asset protection and tax planning, a family trust is a powerful tool. A trust legally separates the ownership of the asset from you personally. This means if your business goes under or you face legal action, creditors generally can’t touch the properties held in the trust.
Trusts also offer tax flexibility, allowing income to be distributed to family members at lower tax rates. However, they come with higher setup and administration costs and can be more complex to manage. Setting up a family trust requires a formal trust deed, and you’ll need ongoing advice from an accountant and lawyer.
The Tax Man Cometh: Deductions, Gearing, and CGT
Property investment in Australia is inextricably linked with the tax system. Understanding the rules can save you thousands of dollars.
- Interest Deductibility: The golden rule is that interest on a loan is deductible if the funds are used to buy an income-producing asset. When you release equity for an investment property, the interest on that portion of your loan becomes tax-deductible. This is why structuring your loans correctly is so important—you need a clear paper trail for the ATO to follow.
- Negative Gearing: This is a cornerstone of Australian property investment strategy. If your property’s expenses (including that deductible interest) are more than the rent you receive, you have a net rental loss. You can offset this loss against your other income, like your salary, which reduces your overall tax bill. It turns a cash-flow loss into a tax-time win, with the long-term goal of capital growth.
- Capital Gains Tax (CGT): When you eventually sell your investment property for a profit, you’ll have to pay CGT. The good news? If you’ve held the property for more than 12 months, you get a 50% discount on the taxable gain. There are also strategies to minimise CGT, such as timing the sale in a low-income year or maximizing your property’s cost base by including all eligible expenses, like renovation costs.
Where to look in 2025: Capital cities vs. The regions
The property market isn’t one single entity; it’s a patchwork of thousands of micro-markets. Currently, one of the most significant trends is the growing divergence between capital cities and regional Australia.
While major hubs like Sydney and Melbourne are seeing modest growth, regional markets have been surging, with growth rates around 5.3% in early 2025. The post-COVID shift to remote work and the search for a better lifestyle have driven up demand in areas such as Geelong, Ballarat, and Bendigo. These areas offer lower entry prices and potentially higher rental yields, making them attractive targets for investors using equity.
Investors should monitor key economic indicators, such as interest rate forecasts, local housing demand and supply, infrastructure spending, and GDP growth, to assess the optimal timing for their investment.
The Alternatives: Is all your money in one basket?
Using equity to buy another property is a form of diversification, but only within a single asset class. It’s worth asking if this is the best use of your capital.
- Superannuation: Pumping extra money into your super has compelling tax advantages. Concessional contributions are taxed at a rate of 15%, and earnings within super are also taxed at a low rate. It’s a less hands-on, long-term strategy that provides stable growth through compounding returns.
- Shares: The stock market offers greater liquidity (it’s easier to sell shares than a house) and requires less capital to get started. However, it’s also more volatile and doesn’t offer the same leverage potential as property.
The Final Verdict
So, should you use your equity to purchase another investment property?
There is no single right answer. It’s a powerful strategy that can accelerate your journey to financial freedom, but it also fundamentally increases your financial risk by concentrating your wealth in a single asset class and placing your family home at risk.
Your decision should depend on your own situation, including your financial stability, life stage, and comfort with risk. You need a good cash-flow buffer, a clear understanding of the numbers, and a long-term plan. This is not a quick way to get rich, but a long-term investment strategy.
Before you make a decision, do your research. Get your home valued, talk to a mortgage broker about the best way to structure your loan, and speak with a financial advisor to make sure your choice fits your overall financial goals. Using your home equity can be a smart move, but only if you plan carefully.
