Using home equity while managing leverage

Home equity is the difference between a property's value and the debt secured against it. Lenders will often allow part of that equity to be borrowed, and many investors use it in place of cash savings to fund the deposit and costs of an investment property. The amount usually treated as usable is the value of the home multiplied by 80 per cent, less the existing loan, and the amount actually available is then capped by what the borrower can afford to repay.

Releasing equity does not create money. It is additional debt secured against the home, and it means the investment is financed almost entirely with borrowings. That increases potential gains and potential losses alike. This guide explains the mechanics and the main risk controls in general terms only. A licensed credit adviser can assess a borrower's circumstances, and a registered tax agent can confirm the tax treatment.

How usable equity is calculated at 80 per cent LVR

The loan to valuation ratio (LVR) is the loan divided by the lender's valuation of the property. Most lenders will lend above 80 per cent LVR only with lenders mortgage insurance (LMI) or a similar risk fee, so 80 per cent is the usual working limit for an equity release. The cost of going higher can be estimated with the LMI calculator.

The calculation has three steps:

1. Multiply the lender's valuation of the home by 80 per cent.
2. Subtract the current balance of all loans secured against it.
3. The remainder is the usable equity, subject to the lender's assessment of repayment capacity.

As an illustrative example, a home valued at $1,000,000 with a $450,000 loan has total equity of $550,000. Eighty per cent of the value is $800,000, so usable equity is $800,000 less $450,000, which is $350,000. The home equity calculator performs the same calculation for other figures.

Two cautions apply. The valuation is the lender's, not an online estimate or an agent's appraisal. APRA's guidance on residential mortgage lending, APG 223, states that sound practice includes recalculating the LVR at the time of any top-up or formal loan increase using an appropriate and contemporary valuation, which may be a full inspection, a kerbside or desktop assessment, or an automated model. Lender valuations can be lower than owners expect. Secondly, usable equity is a ceiling, not a recommendation.

How lenders release equity

Equity is released by borrowing more against the home. The common methods are:

• A loan increase or top-up on the existing home loan.
• A separate loan split secured by the home, with its own account, balance and statements.
• A line of credit secured by the home, drawn as needed. These facilities often carry higher rates and have no set repayment schedule for principal.
• A refinance to a new lender for a higher amount, with the surplus released as a separate split.

In each case the lender completes a full credit assessment, asks the purpose of the funds and may require evidence, such as a contract of sale. A separate split is generally the clearest structure for an investor because it keeps the investment borrowing apart from the home loan, which matters for tax records as discussed below.

Worked example: funding an investment purchase from equity

Continuing the hypothetical example, the owners buy a $700,000 investment property. They release $175,000 from the home, made up of a 20 per cent deposit of $140,000 and an assumed $35,000 for stamp duty and other purchase costs. Actual duty varies by state and territory and can be estimated with the stamp duty calculator. The remaining $560,000 is borrowed against the investment property at 80 per cent LVR.

Item	Before	After purchase
Property value	$1,000,000	$1,700,000
Home loan	$450,000	$450,000
Equity release split secured by the home	Nil	$175,000
Investment loan	Nil	$560,000
Total debt	$450,000	$1,185,000
Combined LVR	45.0%	69.7%
Net equity	$550,000	$515,000

The home is now geared to 62.5 per cent, being $625,000 of debt against $1,000,000, and the investment property to 80 per cent. Net equity falls by $35,000 on the first day because purchase costs are spent, not invested. The whole $735,000 of new debt relates to the investment, so the purchase is 105 per cent debt funded. At an assumed interest rate of 6.5 per cent, interest on the new debt is $47,775 a year, and each one percentage point rise adds $7,350.

Cross-collateralisation versus standalone loans

There are two ways to arrange the security. In the example above the loans are standalone: the home secures the home loan and the equity split, and the investment property alone secures the investment loan. Under cross-collateralisation, the lender takes both properties as security for the combined lending, often as a single larger investment loan.

Consideration	Standalone	Cross-collateralised
Set-up	Two applications or splits, and can involve two lenders	One lender, usually simpler paperwork
Selling one property	The related loan is repaid and the other loan is generally unaffected	The lender may revalue all securities and can decide how much of the proceeds must reduce the remaining debt
Refinancing one loan	Generally possible on its own	Usually requires restructuring all of the linked lending
Fall in value of one property	Contained to the loans that property secures	Can affect the lender's view of the whole portfolio
Future equity release	Assessed property by property	Depends on the combined position

Cross-collateralisation is not improper and may suit some borrowers, but it reduces flexibility and gives one lender control over both properties. Under either structure the home is at risk if the debts secured against it cannot be repaid. Borrowers may wish to confirm which properties secure which loans before signing.

Serviceability: equity is not borrowing capacity

Ample equity does not mean a loan will be approved. Lenders must be satisfied that the borrower can repay all debts. APG 223 sets out the approach APRA expects of authorised deposit-taking institutions:

• A serviceability buffer of at least 3 percentage points over the loan's interest rate, which APRA confirmed in 2025 remained unchanged.
• Buffers applied to existing debts as well as new ones, so the current home loan is also assessed at the higher rate.
• A minimum discount of 20 per cent on expected rental income, with larger discounts where the risk of vacancy is higher.
• No reliance on the potential tax benefits of a rental property that runs at a loss.
• Interest-only loans assessed on principal and interest repayments over the term that remains after the interest-only period.

In the example, if the investment property rents for $28,000 a year, a lender applying the minimum discount would count $22,400. The new debt of $735,000 would be assessed at the assumed rate plus the buffer, 9.5 per cent, at which interest alone would be $69,825 a year. APRA noted when it raised the buffer in October 2021 that the effect is likely to be larger for investors, who tend to have higher leverage and other existing debts.

APRA has also limited lending at debt-to-income ratios of six times or more to 20 per cent of each lender's new mortgage lending from 1 February 2026, applied separately to investor and owner-occupier portfolios. APRA expected the limit to affect investors more than owner-occupiers. A borrower with total debt of $1,185,000 would reach a ratio of six at a gross income of $197,500. The borrowing power calculator gives a general estimate of capacity.

Loan purpose and interest deductibility

Under ATO guidance, whether interest is deductible depends on what the borrowed money is used for, not on which property secures the loan. Interest on funds borrowed against the home and used to buy a rental property is generally deductible while that property is rented or genuinely available for rent. Interest on funds borrowed against a rental property and used for a private purpose, such as a new home, a car or a holiday, is generally not deductible.

Practical consequences follow:

• Keep investment borrowings in a separate split, and avoid paying released funds into an everyday account where they mix with private money.
• Where one loan account has both private and investment uses, the interest must be apportioned, and repayments cannot be directed only to the private portion.
• Amounts redrawn from an investment loan take on the purpose for which the redrawn money is used.
• Keep loan statements and settlement records showing the path of the funds.

The treatment of losses is also changing. Treasury states that from 1 July 2027 negative gearing of residential property will be limited to new builds, with properties held before 7:30pm AEST on 12 May 2026 exempt. For an affected established property, a rental loss will only be deductible against other residential property income, including capital gains, with excess losses carried forward. A registered tax agent can confirm how loan purpose and these rules apply.

Risks of higher leverage

Leverage magnifies the effect of price movements on the owner's equity. In the example, if both properties fell 15 per cent in value, the portfolio would be worth $1,445,000 against debt of $1,185,000. The combined LVR would rise to 82.0 per cent, and net equity would fall from $515,000 to $260,000, a reduction of about 50 per cent. Without the investment purchase, the same fall would have reduced the owners' equity from $550,000 to $400,000, about 27 per cent.

The RBA has explained that negative equity, where the loan exceeds the property's value, arises from high starting LVRs, price falls and interest-only structures that keep balances high. It matters because a borrower in difficulty cannot clear the debt by selling. Other risks include:

• Interest rate rises across a much larger debt.
• Loss of income, whether from employment or from vacancy.
• Concentration, with most of the household's wealth in one asset class and sometimes one city.
• Illiquidity, because property cannot be sold in part or quickly, and selling costs are significant.

Buffers that help manage leverage

• Borrow less than the maximum. Keeping the home below 80 per cent LVR after the release preserves room to refinance.
• Hold a cash buffer in an offset account. Several months of all loan repayments and property costs is a common planning benchmark, not a rule.
• Test the budget at a rate 3 percentage points higher, mirroring the lender's buffer, and with several weeks of vacancy each year.
• Consider principal and interest repayments on at least part of the debt so leverage reduces over time.
• Maintain landlord and building insurance, and review personal insurance with a licensed adviser.

The investment property calculator can be used to test cash flow under different rates and rents. Related guides are in the investment property section, and a free assessment is available for readers who would like to discuss general lending options.