Using Home Equity to Buy an Investment Property
One of the most powerful strategies in Australian property investment is using the equity in your owner-occupied home to fund the deposit on an investment property — without using cash savings. Done correctly, the interest on the equity loan is fully tax-deductible (because the funds are used for income-producing investment), making the ATO an effective co-contributor to your deposit.
The most important structural point in this strategy is separation. The equity loan must be kept in a completely separate account from your owner-occupier mortgage. This creates a clean audit trail for the ATO — all interest on the separate equity account is clearly deductible (investment purpose), while your owner-occupier interest is not. Mixing them creates an accounting nightmare and potential ATO issues.
How It Works — Step by Step
- Step 1 — Assess usable equity: We calculate how much equity you can access (typically to 80% LVR of your home's value minus your existing mortgage)
- Step 2 — Structure the equity loan: A separate loan split or line of credit against your home, specifically for the investment deposit
- Step 3 — Draw the deposit: Funds are available at settlement of the equity loan — ready to use as the deposit on the investment property
- Step 4 — Investment loan: A separate loan for the balance of the investment property purchase (typically 80% of the property value)
- Step 5 — Tax treatment: Interest on both the equity loan (the deposit) and the investment loan is deductible against rental income
Worked Example: Using Equity to Buy in Sydney
- Your home value: $1,600,000 | Existing mortgage: $550,000
- Usable equity (80% LVR): $1,280,000 − $550,000 = $730,000
- Investment property price: $850,000
- 20% deposit needed: $170,000 (from equity loan)
- Investment loan (80%): $680,000
- Total deductible debt: $850,000 ($170K equity + $680K inv. loan)
- Annual deductible interest at 6.59%: ~$56,015
- Tax saving (37% bracket): ~$20,725/year — partially offsetting holding costs
- Weekly rent (at 4.5% yield): $736/week
The Loan Structure That Protects Deductibility
- Owner-occupier mortgage: Account A (not deductible)
- Equity loan for investment deposit: Account B (deductible — separate account)
- Investment property loan: Account C (deductible — separate lender or split)
Never mix funds from Account A and Account B — once contaminated, the ATO may deny part or all of the deductibility on Account B. Your accountant should be aware of the structure from day one.
What If Your Equity Isn't Enough for a 20% Deposit?
- Consider a 10% deposit with LMI on the investment loan — LMI on investment loans is generally deductible over 5 years
- Combine equity with cash savings for the full 20%
- Target a lower-price investment property where 20% deposit is achievable from available equity