How to Use Home Equity for an Investment Property

Using Equity to Buy Another Property: How It Works

You borrow against the value sitting in your current home to fund the deposit and costs on a second property. The lender treats the new purchase as an investment loan, separate from your existing home loan, but both properties often get used as security. The equity you can access depends on how much your Narellan home is worth now, what you owe, and what the lender's maximum loan to value ratio allows.

Consider a property owner in Narellan whose home has increased in value over the past few years. They still owe $320,000 on a property now valued around the suburb's current median. The lender will typically lend up to 80 per cent of the property's value across all loans secured by it, which leaves a usable equity position of roughly $80,000 after keeping a buffer for costs. That amount covers a deposit on a rental property in a neighbouring suburb, plus stamp duty and other settlement expenses, without the owner needing to save separately or sell their home.

What Lenders Look at When You Borrow Against Equity

Lenders assess your borrowing capacity based on your total income, existing debts, living expenses, and the rental income the new property will generate. They apply a serviceability buffer of 3.0 percentage points above the loan product rate and will only count a portion of the expected rent, usually around 80 per cent, to account for vacancy and maintenance periods. If your total debt-to-income ratio sits at six times your gross income or higher, you may fall within a lending quota that limits how much new credit the lender can approve in a given quarter.

In our experience, buyers often underestimate how much the existing home loan repayment affects their capacity to service a second loan. The calculation treats both loans as ongoing commitments, so even if your current repayment feels comfortable, adding another loan can push your serviceability close to the limit. A broker can model different scenarios before you commit, including whether switching your existing loan to interest only temporarily might improve your borrowing power for the investment loan.

Interest Rates and Loan Structure for Investment Borrowing

Investment loan rates sit higher than owner-occupier rates because lenders assign more capital to cover the risk. The difference typically ranges from 0.20 to 0.50 percentage points depending on the lender and your LVR. You can choose between variable and fixed rates, or split the loan across both. Interest only repayments are common for the first few years because they reduce your cash outflow and allow you to direct more of the rental income toward holding costs or other investments.

Interest on the investment loan is deductible against the rental income you receive, and any shortfall between rental income and total holding costs creates a loss that you can offset against your salary under the current negative gearing rules. For properties acquired after mid-May, new restrictions apply from the 2027-28 income year, so losses will only offset income from other residential properties unless the property qualifies as a new build. Properties purchased before that date, or under contract at that time, retain full negative gearing indefinitely.

How LVR and Lenders Mortgage Insurance Affect Your Equity Release

The loan to value ratio determines whether you need to pay for Lenders Mortgage Insurance. If you borrow more than 80 per cent of the combined value of the properties used as security, LMI will apply. The premium is calculated on the amount borrowed above 80 per cent and can add several thousand dollars to your upfront costs. Some lenders allow you to capitalise the premium into the loan amount, which means you don't pay it out of pocket, but it does increase the total amount you owe and the ongoing interest cost.

Narellan sits within a growth corridor that has seen steady demand from families and renters, particularly around the Narellan Town Centre precinct and near the Camden Valley Way corridor. Lenders generally view the area as stable security, which can help with serviceability and LVR assessments, though higher borrowing amounts relative to income will still trigger closer scrutiny under the debt-to-income measures introduced in early 2026.

Structuring Loans Across Two Properties

You can structure your borrowing in different ways depending on what you want to achieve. Some borrowers keep the equity release as a separate loan secured by the original home, then take out a second loan for the investment property secured by the new purchase. Others consolidate both properties under a single security arrangement with multiple loan splits. The structure you choose affects how much interest you can claim as a deduction, how much flexibility you have to repay or redraw, and what happens if you decide to sell one property later.

Keeping the purpose of each loan clearly separated matters for tax. If you borrow $50,000 against your Narellan home and use it as a deposit on a rental property, the interest on that $50,000 is deductible because the funds went toward an income-producing asset. If you later redraw from that loan to renovate your own home, the interest on the redrawn portion is not deductible. A broker can help you set up the loan structure so it's clear from the start what each dollar was borrowed for, which saves confusion at tax time and keeps your claims defensible if the ATO ever asks. For more on how loan structure affects your broader financial position, a loan health check can identify whether your current setup is working as hard as it should.

Rental Income, Vacancy and Holding Costs in Narellan

Lenders will only count a portion of the projected rent when they assess your serviceability, typically 80 per cent, to allow for periods when the property sits vacant or requires maintenance between tenants. Narellan's rental market has remained relatively tight, supported by population growth in the Camden council area and limited new apartment stock, but you should still budget for at least four to six weeks of vacancy per year when you're working out whether the investment will be cash flow positive or negative.

Holding costs include council rates, strata fees if the property is in a complex, landlord insurance, property management fees, and repairs. All of these are deductible when the property is rented or genuinely available for rent. If you're buying a unit near the town centre, expect body corporate fees to add another $1,000 to $1,500 per quarter depending on the facilities and age of the building. These costs reduce your net rental income and affect the overall return, but they also increase your deductible expenses, which lowers your taxable income.

How the 2027 Tax Changes Affect New Investment Purchases

From the 2027-28 income year, losses on established residential properties purchased after mid-May can only be offset against income from other residential property, not against your salary. Losses can be carried forward to use in future years, and you can still claim them against capital gains when you eventually sell. The restriction does not apply if the property qualifies as a new build, meaning it was constructed on vacant land or replaced an existing dwelling while increasing the total number of dwellings on the site.

If you're buying an established home or unit in Narellan as an investment, the new rules mean you won't see an immediate tax refund from the loss unless you own other rental properties generating income. You'll still build equity, benefit from any capital growth, and retain all the usual deductions, but the cash flow effect in the early years will be different. For buyers focused on near-term tax relief, a new build in a neighbouring growth area might deliver a better outcome under the current framework, though the purchase price and rental yield need to stack up independently of the tax treatment.

Refinancing to Access Equity Without Changing Your Investment Loan

If your current home loan rate or features no longer suit your situation, refinancing can be a useful way to access equity and improve your borrowing position at the same time. You can move to a lender offering a lower rate, switch from principal and interest to interest only on the existing loan to improve cash flow, or consolidate other debts to reduce your total monthly commitments and improve serviceability for the investment loan.

Refinancing does involve some cost, including discharge fees from your current lender, application fees with the new lender, and valuation costs, but these are often outweighed by the rate saving or the increased borrowing capacity. Some lenders will also cover certain costs as part of a refinance offer, particularly if you're bringing across a large loan balance or moving multiple facilities.

What Happens If Your Equity Position Isn't Enough

If the equity in your Narellan home doesn't stretch far enough to cover the deposit and costs on the property you want to buy, you have a few options. You can look at a lower-priced investment property, save additional funds to top up the deposit, consider paying LMI to borrow above 80 per cent, or wait until your home increases in value or you pay down more of the loan. Some buyers also bring in a family member as a co-borrower or guarantor, though this adds complexity and shared liability that needs careful discussion.

Another option is to review your current borrowing capacity with a broker who can model different lender policies and identify whether another lender's serviceability formula gives you more room. Lenders apply different interest rate buffers, treat rental income differently, and assess living expenses in different ways, so the amount you can borrow can vary by tens of thousands of dollars depending on which lender you approach.

Call one of our team or book an appointment at a time that works for you. We'll walk through your current equity position, model your borrowing capacity across lenders, and help you structure the loans in a way that supports your investment goals and keeps your tax position clear.

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