Why Should You Use Equity to Buy an Investment Property?

Equity in your existing property lets you access borrowing capacity without liquidating other assets or waiting years to save a second deposit.

For East Melbourne property owners, rising values in the suburb have created opportunities to leverage equity and move into the investment market. Your equity position is the difference between your property's current market value and what you owe on the mortgage. Lenders allow you to access a portion of that equity to fund a deposit and purchase costs on a second property, leaving your existing loan structure largely intact. The application process involves a valuation of your current property, a serviceability assessment across both loans, and approval of the new security. The loan amount you can access depends on your combined borrowing capacity and the loan to value ratio the lender will support across both properties.

How Equity Release Works for a Second Property Purchase

You borrow against the value of your current home to fund the deposit and costs for an investment property. The lender treats your existing property as security for the additional borrowing, either by increasing your current loan or establishing a separate facility linked to the same security. Most lenders will allow you to borrow up to 80 per cent of your property's value across all loans secured against it without requiring Lenders Mortgage Insurance. If you need to exceed that threshold, LMI applies to the portion of borrowing above 80 per cent. The released equity covers the deposit on the investment property, stamp duty, and other settlement costs, meaning you do not need to provide cash savings for the purchase.

Consider a property owner in East Melbourne with a home valued at $1.2 million and an outstanding mortgage of $500,000. At 80 per cent LVR, total borrowing against that property can reach $960,000, leaving $460,000 in accessible equity. After retaining a buffer for costs, around $420,000 could be applied to the deposit and purchase costs on an investment property. That level of equity would support a purchase in many Melbourne growth suburbs without triggering LMI on either loan.

Why Should You Structure the Investment Loan Separately?

Keeping the investment loan separate from your home loan preserves clarity for tax purposes and simplifies future refinancing. Interest on borrowings used to acquire an investment property is deductible against rental income and other assessable income, provided the property is genuinely available for rent. Interest on borrowings for private purposes, such as your home, is not deductible. If you mix the two loans or redraw funds across both purposes, the ATO may disallow part of your deduction. Structuring the investment loan as a standalone facility, even when secured against your home, keeps the paper trail intact and ensures every dollar of interest on that facility relates to the investment property.

This separation also matters when you want to refinance one loan without disturbing the other. If your home loan reaches the end of a fixed term or you find a lower rate elsewhere, you can move that loan to a new lender while leaving the investment loan in place. The reverse also applies. Lenders assess each facility on its own merit, and keeping them separate reduces the administrative burden when only one loan needs attention.

Interest Only Repayments and Cash Flow Management

Interest only repayments reduce the monthly cost of holding an investment property and improve cash flow during the early years of ownership. Under an interest only arrangement, you pay only the interest component of the loan for a set period, typically one to five years. The loan amount does not reduce during that time, but your repayment obligation is lower than it would be under principal and interest. Once the interest only period ends, the loan reverts to principal and interest unless you negotiate an extension or refinance.

This structure is widely used by property investors who expect capital growth to build equity over time and who prefer to direct surplus cash toward other investments or offset the holding costs of the property. Rental income on an investment property rarely covers the full cost of the mortgage, especially in the early years. The difference between rental income and total holding costs, including interest, insurance, body corporate fees and maintenance, is often negative. That shortfall is funded from your other income and can be claimed as a deduction under current negative gearing rules, provided the property was held before the legislative changes that took effect from the 2027-28 income year.

Under the legislation in force from the 2027-28 income year, losses on established investment properties acquired after May 2026 are only deductible against income from other residential properties, not against salary or wages. Properties purchased as eligible new builds remain exempt and retain full negative gearing treatment. For investors in East Melbourne considering a second property, the structure of the loan and the purchase date determine how rental losses are treated for tax purposes. Interest only repayments do not change the deductibility of interest, but they do reduce the immediate cash outflow, which can be relevant when managing multiple loans and planning for future rate movements.

What Happens to Borrowing Capacity When You Add a Second Loan?

Your borrowing capacity is assessed across all existing and proposed debts, including both your home loan and the new investment loan. Lenders apply a serviceability buffer of at least 3 percentage points above the loan product rate, meaning they test your ability to service both loans at a rate higher than you will actually pay. They also account for the rental income from the investment property, but they discount it, typically applying 80 per cent of the assessed rental income to allow for vacancy and periods between tenants. Your other commitments, including credit cards, personal loans, and ongoing living expenses, are included in the assessment.

The effect is that adding an investment loan reduces the amount you could borrow in future until your income rises or your debts reduce. Lenders also apply debt-to-income limits, which restrict the proportion of lending to borrowers with total debt above six times their gross income. From February 2026, no more than 20 per cent of new investor loans at each lender can be made to borrowers with a DTI ratio of six or more. If your combined home and investment loan pushes your DTI above that threshold, some lenders may decline the application even if serviceability at the buffered rate is satisfied. Others may approve the loan but place it within their restricted allocation, which can mean longer turnaround times or less flexibility on rate discounts.

For an East Melbourne resident earning $180,000 per year, a total debt position of $1,080,000 across both loans would sit at the six times threshold. Borrowing beyond that point may be possible depending on the lender's portfolio settings and your overall credit profile, but it requires careful structuring and often the support of a broker familiar with each lender's current appetite for high DTI investment lending.

How East Melbourne's Property Market Supports Equity Growth

East Melbourne's proximity to the CBD, strong demand from professionals and downsizers, and limited supply of detached housing have supported sustained price growth over the past decade. The suburb is bordered by Fitzroy Gardens, the Melbourne Cricket Ground precinct, and the eastern edge of the Hoddle Grid, placing it within walking distance of major employment, transport, and cultural infrastructure. The housing stock is dominated by apartments and townhouses, with a smaller proportion of heritage terraces and period homes. Median values in the suburb have consistently outpaced many middle-ring areas, creating equity for owners who purchased several years ago.

That equity position is what allows existing owners to enter the investment market without needing to sell or save from scratch. If you purchased in East Melbourne five or more years ago, the difference between your purchase price and the current valuation may be sufficient to fund a deposit on a second property in a suburb with lower entry prices and solid rental demand. The released equity acts as the deposit, and the investment property itself becomes the primary security for the new loan. Your East Melbourne home may also be used as additional security, depending on the LVR and the lender's policy, but the investment property must be able to support the loan on its own serviceability metrics in most cases.

Fixed Rate or Variable Rate for an Investment Loan?

Variable rate investment loans offer offset account access and full repayment flexibility, while fixed rate loans provide repayment certainty but typically restrict extra repayments and do not support offset accounts. The choice depends on whether you value certainty or flexibility more highly, and whether you expect to hold surplus cash that could sit in an offset account and reduce the interest charged. Under a variable rate loan, interest is calculated daily on the outstanding balance minus any funds in a linked offset account. If you hold cash reserves or rental income in the offset account, the effective interest cost on the loan is reduced without affecting the deductibility of interest, because the loan balance itself does not change.

Fixed rate loans lock in a rate for a set term, typically one to five years, and insulate you from rate rises during that period. If rates fall, you remain locked in unless you break the contract and pay the associated break costs. Fixed rate investment loans generally do not offer offset accounts, meaning surplus funds cannot reduce the interest charged unless you make a lump sum repayment, which may be capped or prohibited depending on the loan terms. Most investment loan structures used by portfolio builders involve a variable rate loan with an offset account to manage cash flow and minimise interest, or a split structure where part of the loan is fixed for certainty and part remains variable for flexibility.

Your decision should account for your cash flow, your view on future rate movements, and the tax treatment of any surplus funds. Interest paid on the investment loan is deductible, so reducing the loan balance with extra repayments may not be the most tax-efficient use of surplus cash compared to leaving the loan balance unchanged and using an offset account or directing the cash elsewhere.

What Are the Upfront Costs When Using Equity to Buy an Investment Property?

Stamp duty is the largest upfront cost and varies by state, purchase price, and whether the property is new or established. In Victoria, stamp duty on an established investment property is calculated on a sliding scale and is not reduced by any first home buyer concessions. Other upfront costs include conveyancing, building and pest inspections, lender application fees, valuation fees, and settlement charges. If your total borrowing across both properties exceeds 80 per cent of the value of the security, LMI applies and is calculated based on the loan amount and LVR. The premium can be capitalised into the loan or paid upfront, but capitalising it increases the loan balance and the ongoing interest cost.

These costs are factored into the amount of equity you need to release. Releasing equity to cover only the deposit without accounting for stamp duty and other settlement costs will leave you short at settlement. A broker structures the borrowing to ensure the released equity covers the full amount required, and the application is submitted with all costs disclosed so the lender can assess serviceability accurately.

Ongoing Costs and Tax Deductions for Investment Property Owners

Ongoing costs include loan interest, council rates, water rates, insurance, property management fees, body corporate fees where applicable, repairs, and maintenance. All of these costs are deductible against your assessable income to the extent the property is rented or genuinely available for rent. Depreciation on the building and fixtures can also be claimed, subject to the rules that apply to the construction date of the property. Capital works deductions apply to properties built after 1987, and plant and equipment depreciation applies to removable fixtures such as appliances, blinds, and floor coverings, subject to restrictions on second-hand assets introduced in earlier legislation.

The deductibility of these expenses depends on the purchase date of the property and whether it qualifies as an eligible new build under the legislation that took effect from the 2027-28 income year. Established properties acquired after May 2026 are subject to quarantining of losses, meaning rental losses can only be offset against other residential property income, not against salary and wages. Losses can be carried forward and applied in future years when the property generates a profit or when you sell and realise a capital gain. Properties acquired before that date, and eligible new builds, retain full deductibility of losses against all income.

Why Should You Work with a Broker When Structuring an Investment Loan?

Brokers compare investment loan products across multiple lenders and structure the application to match your circumstances and the specific property you are purchasing. Each lender has different policies on LVR, acceptable security types, rental income treatment, interest only terms, and high DTI lending. A broker identifies which lenders will support your application and which will offer the most suitable loan features and pricing for your situation. The broker also manages the valuation process, liaises with the lender's credit team, and ensures the application is submitted with all supporting documents to avoid delays.

For borrowers using equity to purchase a second property, the structure of the lending is more involved than a single loan application. The broker determines how much equity is available, how the security will be allocated across both loans, whether LMI is required, and how the loans will be documented to preserve tax deductibility and future flexibility. The broker also considers your broader goals, such as whether you plan to purchase further properties, whether you expect to sell your home and move the lending, or whether you want the option to refinance each loan independently in future. That level of planning ensures the loan structure supports your portfolio growth rather than creating obstacles when your circumstances change.

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