Beginner's guide to using home equity

Your home's value has climbed, and now you're wondering if you can use that growth to buy an investment property without selling.

You can. The home you own contains usable equity, and lenders will let you borrow against it to fund a deposit and costs on a second property. You don't need to wait until you've paid the first loan off, and you don't need to start from scratch with savings. The property you already own does the work.

What counts as usable equity

Usable equity is the portion of your property's value that sits above what you owe, minus a buffer the lender holds back. Most lenders will let you borrow up to 80 per cent of your home's current value across all loans secured against that property. Some will go to 90 per cent if you pay Lenders Mortgage Insurance.

Consider a FIFO heavy diesel mechanic who bought in Baldivis three years ago. The property was worth $715,000 at purchase with a 10 per cent deposit. The loan started at $643,500. The home is now worth around $830,000 based on the 12 months to June. The loan balance has dropped to $610,000. At 80 per cent LVR, the lender will allow total borrowing of $664,000 against that security. That leaves $54,000 in usable equity before LMI applies.

That $54,000 can cover a 10 per cent deposit on a $450,000 unit in Mackay, plus most of the stamp duty and settlement costs. The mechanic keeps the Baldivis home, keeps living in it or rents it out, and now owns a second property without liquidating the first.

How lenders assess your borrowing capacity when you already own property

Your income hasn't changed, but your commitments have. The lender now needs to service two loans, not one. If you're keeping the first property as your home, they'll add the new investment loan repayment to your existing mortgage and test both against your income. If you're converting the first property to an investment and buying a new owner-occupied home, they'll assess rental income from the first property but shade it to account for vacancy and management costs. Suncorp, for example, shades non-essential services overtime and allowances to 80 per cent where you've earned them continuously for six months or more, and that shading applies to FIFO workers in mining, resources and construction.

The other factor is the debt-to-income limit that came in from February. Banks are restricted on loans where your total debt exceeds six times your gross annual income. A heavy diesel mechanic earning $160,000 in total income hits the DTI threshold at $960,000 in combined borrowing. If your first loan is $610,000 and you're applying for another $450,000, your total debt would be $1,060,000. That puts you over the six-times cap, and most mainstream banks will either reduce the loan amount, tighten the buffer or decline. Non-bank lenders regulated by ASIC are not subject to the same portfolio caps, which is why FIFO property applications increasingly get referred to non-ADI lenders when DTI becomes a constraint.

Should you fix or go variable on an investment loan

Variable rates on investment loans currently sit above owner-occupied rates by around 20 to 40 basis points depending on the lender. Fixed rates are higher again. The decision comes down to cash flow predictability versus flexibility. If you fix, your repayment is locked for the term, but you lose the ability to make extra repayments without penalty, and if you need to sell or refinance before the fixed term ends, break costs apply.

Most FIFO workers we talk to prefer variable for investment loans because income is strong during the earning years, and the ability to redraw or offset against the loan balance matters more than rate certainty. Interest-only repayments are another option. They lower your monthly commitment and maximise the tax deduction, but they don't reduce the loan balance. You're paying interest and building equity through capital growth only. Interest-only terms are typically approved for five years at a time on investment loans, and the loan reverts to principal and interest after that unless you apply to extend.

What happens to your tax position when you borrow against equity

Interest on borrowings used to acquire or hold a rental property is deductible against your assessable income under current tax law. That includes interest on the portion of your home loan that you drew down to fund the investment deposit. If you refinance your owner-occupied home to release $54,000 in equity and use that $54,000 as a deposit on a rental property in Mackay, the interest on that $54,000 is deductible even though it's secured against your home, not the investment.

The deduction follows the purpose of the borrowing, not the security. You'll need to split your loan or keep separate accounts so the interest on the investment portion can be tracked and claimed. Most lenders will set this up as a separate split at the time of drawdown. The interest on the remaining balance of your home loan, the portion you're using to live in or that you borrowed for private purposes, is not deductible.

From the 2027-28 income year, new tax rules apply to losses on established investment properties acquired after 12 May. Those losses can only be offset against other residential property income, not against salary. Properties you owned at 7:30pm AEST on 12 May, including properties under contract at that time, are grandfathered and continue to allow full negative gearing. New builds acquired after that date are also exempt and allow full deductions against all income. The changes don't affect the deductibility of interest, they just limit where you can use the loss if your property expenses exceed your rental income.

Rental income and vacancy rates in FIFO home-base markets

Gross rental yields in Mackay units are running around 5.55 per cent based on a $450,000 median and $480 per week rent. Townsville units are yielding approximately 6.07 per cent. Those figures sit well above the 4 to 4.5 per cent you'd get in outer Perth estates like Baldivis, where house rent is around $680 per week on an $830,000 median.

Vacancy in Mackay was 0.92 per cent in June, and Townsville's rental market is similarly tight. Both cities have ongoing demand driven by Bowen Basin coal mining and defence sector employment. The question for a FIFO worker buying in these markets is whether you're prepared to manage a property in a city you don't live in. Most use a local property manager. Management fees typically run between 7 and 10 per cent of the rent plus letting fees and marketing costs when a tenant changes. That reduces your net yield but removes the need to be on the ground.

Equity release versus saving a second deposit

If you've got $54,000 in usable equity now and property values are rising at 16 to 22 per cent per year in northern Adelaide or outer Perth, waiting another two years to save a cash deposit means the property you're targeting today will cost an additional $70,000 to $100,000 by the time you're ready. You'll need a bigger deposit, pay more stamp duty, and borrow more. The alternative is to release equity now, buy at today's price, and let the second property start earning rent and capital growth while you're still paying down the first loan.

The trade-off is higher total debt and higher monthly repayments. If your income can service both loans comfortably and your DTI ratio sits under six times, accessing equity is usually the faster path. If you're close to the DTI cap or your roster is changing, saving a separate deposit and keeping your borrowing lower might make more sense. There's no universal right answer, but the decision should be based on numbers, not sentiment.

How home loan refinancing unlocks equity without changing lenders

You don't need to refinance to access equity. Most lenders will let you apply for a top-up or further advance on your existing loan if you've been making repayments on time and the property has increased in value. The lender orders a new valuation, recalculates your usable equity, and increases your loan limit. You draw down the additional funds when you're ready to use them. The interest rate stays the same as your current loan unless you negotiate a better rate at the same time.

Refinancing to a different lender can sometimes get you a lower rate, a higher borrowing limit, or access to features your current loan doesn't offer, like an offset account or a longer interest-only period. The cost of refinancing includes valuation fees, application fees, discharge fees from your old lender, and sometimes settlement fees with the new lender. Those costs usually sit between $1,500 and $3,000. You'll need to weigh that against the benefit of a lower rate or better loan structure. If the rate saving is 30 basis points or more and you're borrowing over $600,000, refinancing typically pays for itself within the first year.

Call one of our team or book an appointment at a time that works for you. We'll run the numbers on your current property, calculate your usable equity, and show you what you can borrow without putting your home at risk.

Frequently Asked Questions