If you own a home in Sydney that has grown in value, you may already be sitting on enough equity to fund the deposit for an investment property — without touching your savings. Here's exactly how equity lending works for investors.
What Is Usable Equity?
Equity is the difference between your property's current market value and what you owe on it. But not all equity is available for you to borrow against. The key concept for property investors is usable equity.
Most lenders will allow you to borrow up to 80% of your property's current value (the 80% LVR rule), minus your existing mortgage balance. Borrowing above 80% LVR is possible but triggers Lenders Mortgage Insurance (LMI), which adds a significant cost.
Usable Equity Calculator Example
Property Value
$900,000
80% of Value
$720,000
Existing Mortgage
$300,000
Usable Equity Available
$420,000
($720,000 – $300,000 = $420,000 usable equity)
In this example, the homeowner has $420,000 in usable equity — more than enough to cover a 20% deposit on a $550,000 investment property, plus stamp duty and acquisition costs.
It's worth noting that lenders will order a fresh valuation of your property before approving any equity release. In a rising market, this can work in your favour — the valuation may come in higher than you expected, increasing your usable equity.
Two Ways to Access Your Equity
Option 1: Standalone Equity Loan (Recommended)
The preferred approach for most investors is to take out a separate equity loan (or line of credit) secured against your existing home. This loan sits alongside your current mortgage as a distinct facility, usually at a variable rate with interest-only repayments.
The key advantage is that it keeps your investment debt completely separate from your home loan debt — which is important for tax purposes (more on this below). You draw only what you need, use it as the deposit for the investment property, and take out a separate investment loan for the remainder.
Option 2: Cross-Collateralisation (Generally Avoid)
Some lenders will offer to "cross-collateralise" your properties — using both your home and the investment property as security for a single combined loan facility. While this can simplify paperwork at the outset, it creates significant complications down the track:
- Selling either property requires your lender's approval and may trigger a full reassessment of all your loans
- Mixing investment and owner-occupier security complicates your tax deductions
- You lose flexibility to refinance the properties independently
- If property values fall unevenly, you may find yourself trapped
Broker Tip
At Mortgagefy, we strongly recommend keeping investment and owner-occupier lending separate wherever possible. The short-term convenience of cross-collateralisation is almost never worth the long-term structural disadvantages. Separate facilities give you far more flexibility and better tax outcomes.
Interest-Only vs Principal & Interest for Investment Loans
One of the most common strategic decisions for property investors is whether to take an interest-only (IO) loan or a principal and interest (P&I) loan on the investment property.
Interest-Only (IO) Loans
For the IO period (typically 5 years, extendable to 10 years at some lenders), you only pay the interest component each month — meaning your loan balance doesn't reduce. This maximises your cash flow, as your repayments are lower, and it maximises your tax-deductible interest expense in the short term.
IO loans make sense for investors who:
- Want to maximise their tax deduction in high-income years
- Are relying on capital growth rather than rapid debt reduction as their wealth-building strategy
- Have a clear plan to pay down non-deductible debt (their home loan) faster using the freed-up cash flow
Principal and Interest (P&I) Loans
P&I loans are now available at slightly lower rates than IO loans (following APRA's intervention in 2017), and they build equity in the investment property over time. They're appropriate for investors who:
- Want to build equity in the investment as a long-term wealth strategy
- Have no owner-occupier debt to direct savings toward
- Plan to hold the property for 20–30+ years and want it fully paid off by retirement
Negative Gearing and Tax Deductions for Sydney Investors
An investment property is said to be negatively geared when the rental income it generates is less than the total costs of owning it (loan interest + rates + insurance + maintenance + property management fees). The net loss is deductible against your total taxable income.
What Can You Deduct?
- All interest on the investment loan and the equity loan used for the deposit
- Property management fees (typically 7–10% of rent)
- Council rates and water rates
- Building insurance and landlord insurance premiums
- Repairs and maintenance (not improvements)
- Depreciation on the building structure (2.5% per year on buildings built after 1987) and fixtures
- Advertising costs for finding tenants
- Accounting fees for tax return preparation related to the property
Important Tax Note
The interest on money borrowed for investment purposes is deductible, but the interest on money borrowed for personal purposes (your owner-occupier home loan) is not. This is why it's critical to keep investment and personal debt in separate accounts from day one. Mixing them — even by accident — can compromise your tax deductions. Always consult your accountant before making any investment property decisions.
APRA Lending Changes for Investors
The Australian Prudential Regulation Authority (APRA) has introduced several policies over the past decade that affect how lenders assess investor loans. Key current considerations include:
- Serviceability buffer: Lenders must assess your ability to service the loan at the current rate plus a minimum 3% buffer (set by APRA). This means your income needs to be sufficient to service the loan at approximately 9%+ on current rates.
- Rental income shading: Most lenders count only 70–80% of projected rental income when assessing loan serviceability.
- Existing debts included: All your existing debt obligations (home loan, credit cards, other investment loans) will be factored into the serviceability assessment.
- Investor loan pricing: Some lenders still apply a small premium to investor loan rates vs owner-occupier rates, typically 0.1–0.3%.
Case Study: The Nguyen Family Used $380K Equity to Buy in Liverpool
The Nguyen Family — Cabramatta, Sydney
Used equity from family home · Investment unit in Liverpool
Minh and Lan Nguyen had owned their Cabramatta home for 11 years. They'd paid the $650,000 purchase price down to $320,000, and a recent valuation put the property at $1.1 million — reflecting the strong price growth in south-western Sydney.
Their usable equity calculation: ($1,100,000 × 80%) − $320,000 = $880,000 − $320,000 = $560,000 in usable equity.
They wanted to purchase a $550,000 two-bedroom unit in Liverpool as a buy-and-hold investment. Mortgagefy structured the deal as follows:
- Equity loan: $110,000 drawn against Cabramatta home (20% of investment property + purchase costs + stamp duty) — interest only at 6.34%
- Investment loan: $440,000 secured against the Liverpool unit — P&I over 30 years at 6.44%
- No LMI on either loan, as LVR on the investment property was exactly 80%
- Total cost outlay from savings: $0 — the entire transaction funded through existing equity
$550K
Investment property value
$0
From personal savings
$420/wk
Projected rental income
Before You Proceed: Key Questions to Ask Your Broker
- Can I realistically service both loans based on my current income and the projected rental income?
- What is the current valuation of my home, and how much usable equity do I actually have?
- Should I go interest-only or P&I on the investment loan given my tax position?
- What lender offers the best combination of equity loan rate + investment loan rate?
- Should I use a line of credit or a fixed equity loan for the deposit?
The Mortgagefy investor team works with Sydney property investors daily. We understand the structuring nuances, know which lenders are most investor-friendly in the current environment, and can run a full serviceability assessment before you commit to anything. Use our borrowing power calculator for an initial estimate, then book a free call to discuss your strategy.
Ready to talk to a broker?
Get a straight answer about your borrowing power — no credit check, no obligation. Our Sydney mortgage broker team is available Mon–Sat 9am–7pm.