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Using Equity to Buy Your Next Property: How It Works and the Risks

Using your home's equity to buy another property isn't spare cash. It's more borrowing, secured on the home you already own. Here's how it works and the risks you take on.

By Eleanor Hayes · · 6 min read

using equity to buy investment propertyhow to use equityhome equityhome loans australiaborrowing to invest

Using equity to buy · risks first

It's borrowing, not free money

your home is the security, so you can lose it

usable equity is only up to about 80% of value before LMI

the bigger loan is re-tested against your income

Source: ASIC MoneySmart; RBA.

Using the equity in your home to buy another property is a heavily marketed move in Australian property, and often a poorly explained one. The pitch calls it "putting your equity to work". What's actually happening is simpler and more serious: you're borrowing more money, secured against the home you already own. This guide sets out how it works and, more importantly, the risks you take on when you do it.

It's a guide, not advice, and it isn't a recommendation to invest. For how refinancing itself works, see refinancing your home loan. If you're thinking of drawing equity out as cash for something other than a property, that's cash-out refinancing, a separate decision.

Key takeaways
  • Using equity to buy the next property means borrowing more against your home. It's not spare cash, and your home is the security.
  • You can't use all your equity: lenders generally lend up to about 80% of a property's value before LMI, so the usable part is the gap between your loan and that ceiling.
  • MoneySmart is blunt: “you could lose your home if the investment turns bad”, and you repay the loan whatever the investment does.
  • The bigger loan is re-tested against your income, and if prices fall you can end up owing more than the property is worth.

How does using equity to buy another property work?

You borrow against the equity in your current home to fund the deposit, or the whole purchase, of another property. Equity is "the value of an asset such as your house or property, less any money owing on it" (ASIC MoneySmart). Accessing it means taking out a bigger loan, or a second one, secured on your home, so the equity becomes debt you have to service and repay. It is not money sitting in an account waiting to be spent.

That framing matters, because the rest of the decision follows from it. This article is about using equity to buy a property. Drawing equity out as cash for other purposes is a related but separate move, covered in cash-out refinancing.

One more structural point: how the borrowed money is used, and how the loan is split, can affect whether the interest is tax-deductible. Get advice from a registered tax agent before you draw on it, and keep the investment borrowing in its own loan split.

How much equity can you actually use?

Less than your total equity, because lenders don't let you borrow against all of it. As a general guide, lenders lend up to about 80% of a property's value before lenders mortgage insurance (LMI) applies. So the usable slice is roughly the gap between what you still owe and that 80% ceiling. Push above 80% and you can trigger LMI, a one-off premium that protects the lender, not you (ASIC MoneySmart).

So your usable equity is not the whole of your equity. It's the part that takes your total borrowing up to that roughly 80% mark, and it shrinks the more you already owe. The exact figure depends on your lender and your income. Treat "80%" as a guide, and run your own numbers through an equity or borrowing calculator rather than assuming all of your equity is available. How much you can actually borrow is a serviceability question, not just an equity one, which is the next section.

Usable equity is only part of your equity Lenders generally lend up to about 80% of value before LMI · illustrative split 80% of value · LMI ceiling What you still owe Usable equity Above 80%: LMI usually applies $0 Property value (100%) Read it as a shape, not your numbers The more you owe, the smaller the usable slice; it depends on your loan and lender. Concept based on ASIC MoneySmart: LMI applies above 80% of the property's value.

Usable equity is the slice between what you owe and the ~80% ceiling, not your total equity. The split is illustrative; borrowing above 80% usually triggers LMI.

The risk you're really taking: your home is the security

Your home is the security for what you borrow against it, which means you can lose it if you can't keep up the repayments. MoneySmart puts it plainly: "Some lenders let you borrow to invest and use your home as security. It's important you know that if you do this, you could lose your home if the investment turns bad" (ASIC MoneySmart). This is the part the "put your equity to work" pitch leaves out.

Two consequences follow. First, you repay the loan no matter what the new property does: "You still have to repay the investment loan and interest, even if your investment falls in value" (ASIC MoneySmart). Second, security is not a formality: "the lender may sell the asset to get its money back" if the loan isn't repaid (ASIC MoneySmart). So the downside of using equity isn't just a smaller return; it can be the home you started with. That's the risk to weigh before the upside.

Will the bigger loan pass the lender's test?

Not automatically, because equity on paper doesn't lift your borrowing power. The bigger loan is assessed against your income and expenses like any new loan. MoneySmart's own advice is to "borrow less than the maximum amount the lender offers", warning that "the more you borrow, the bigger your interest repayments and potential losses" (ASIC MoneySmart). Having equity to draw on doesn't mean you can service the larger debt.

Lenders also test you at a rate well above the one you'd pay, which is how a lender assesses your borrowing power on the bigger loan. MoneySmart suggests the same discipline for yourself: "calculate what your costs would be if interest rates went up by 3%" (ASIC MoneySmart). If the enlarged repayment only works at today's rate, it doesn't really work. A licensed mortgage broker can help you compare options and check the numbers, but only the lender can approve them.

Two traps: cross-collateralisation and negative equity

Two risks catch people who stretch equity to its limit. The first is cross-collateralisation: using more than one property as security for the same loan or group of loans, so the lender holds both your home and the new property as security. There's no single consumer rule to look up for it, so it's a lending-structure question to confirm in your loan documents and with a licensed mortgage broker. The point to hold onto is the one from the section above. Whichever property is put up as security can be sold if the debt isn't repaid, so how the loans are structured decides what's on the line.

The second is negative equity, which the Reserve Bank defines as "where the outstanding balance on the loan exceeds the value of the property it is secured against" (RBA). Borrow to the maximum against your equity and you leave a thin buffer, so if prices fall you can owe more than the property is worth. The RBA notes a borrower in that position "cannot fully repay their debt by selling the property", and is "more likely to default" if their income also drops (RBA). Equity can shrink as fast as prices do.

Is interest-only the answer?

Interest-only lowers the repayment, but it doesn't lower the risk, and it can hide it. During an interest-only period "you pay nothing off the amount borrowed, so it doesn't reduce", and MoneySmart warns "your repayments will increase after the interest-only period, which may not be affordable" (ASIC MoneySmart). The principal you skip now doesn't go away: when the interest-only period ends, you repay it over a shorter remaining term, usually at a higher monthly repayment.

There's a second catch that matters when the whole plan rests on equity: "if your property doesn't increase in value during the interest-only period, you won't build up any equity" (ASIC MoneySmart). And interest-only can cost more over the life of the loan. It's a cash-flow tool with real trade-offs, not a way to make an unaffordable purchase affordable, so weigh it with a broker rather than treating it as the fix.

The bottom line

Using equity to buy your next property can work. But it works only when you see it for what it is: more borrowing, secured on your home, tested against your income, and exposed if prices fall. The sober questions are the right ones. How much can you actually use before LMI? Could you service the bigger loan at a rate 3% higher? What happens to the home you own if the plan doesn't work out? And passing a lender's test is not the same as a sound investment. Model the rent conservatively against vacancy, rates, insurance and repairs, and keep a buffer for a rate rise or an empty month (ASIC MoneySmart).

Answer those first, with real numbers, before the deposit on the next place. A licensed mortgage broker can help structure the borrowing and compare lenders, though only the lender can approve it. knest.ai can help you map where your borrowing position stands before you start.

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knest.ai's buyer-side property intelligence lets you ask anything, research a home, or estimate your borrowing power, with loan comparison, deposit and LVR, and repayment scenarios in the app. It's general information to help you ask better questions, not investment advice or a recommendation to borrow.

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Frequently asked questions

How much equity can I use to buy another property?

Less than your total equity. Lenders generally lend up to about 80% of a property's value before LMI, so the usable part is roughly the gap between what you owe and that 80% ceiling (ASIC MoneySmart). The exact figure depends on your lender and your income, so run it through an equity or borrowing calculator rather than assuming all of it is available.

Can I lose my home using equity to invest?

Yes. When you borrow against your home, it's the security for the loan, and MoneySmart states “you could lose your home if the investment turns bad” (ASIC MoneySmart). You also repay the loan even if the new property falls in value. That's why the risk is weighed before the potential return, not after.

What is cross-collateralisation, and should I avoid it?

Cross-collateralisation means more than one property secures the same loan or group of loans, so the lender holds both as security. There's no single consumer rule to look up, so whether to structure your loans that way is a question to confirm in your loan documents and with a licensed mortgage broker. The risk to understand is that any property put up as security can be sold if the debt isn't repaid.

Does using equity increase how much I can borrow?

No, not by itself. Equity gives you something to borrow against, but the bigger loan is still assessed against your income and expenses, and MoneySmart advises borrowing under the maximum offered (ASIC MoneySmart). A common test is whether you could still afford repayments if rates rose by 3%.

Is an interest-only loan a good way to buy an investment property?

It lowers the repayment but not the risk. You pay nothing off the balance during the interest-only period, repayments jump when it ends, and you build no equity if the property doesn't rise in value (ASIC MoneySmart). Treat it as a cash-flow tool with trade-offs to weigh with a broker, not a way to afford an otherwise unaffordable purchase.

Sources

Eleanor Hayes, Editor, knest.ai

This article is general information for Australian home buyers and owners, not personal financial, credit, legal or tax advice, and not a recommendation to refinance, borrow or invest. knest.ai is a buyer-focused property intelligence platform that provides decision support, not a broker or lender service, and does not replace a licensed mortgage broker or lender. Any broker introduction through the Home Loan Expert is buyer-initiated and never automatic; where knest.ai receives a benefit from such an introduction, that benefit is disclosed to you. Verify any figures for your own circumstances before you act.

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