How to Use Equity to Buy Another Property

If you’ve owned a home in Sydney for a few years, there’s a good chance you’ve built up a significant amount of equity, even if you haven’t really thought about it. With property values rising over time and your loan balance gradually reducing, many homeowners find themselves sitting on what feels like “paper wealth.” The natural next question is: can you actually use that equity to buy another property?

The answer is yes, and it’s one of the most common ways Australians step into property investing. But it’s also an area where structure matters more than most people realise.

In this guide, we’ll walk through exactly how to use equity to buy another property, including how usable equity is calculated, how much you can borrow, the step-by-step process, loan structuring options, tax implications, and the common mistakes to avoid. If you’re new to the concept, start with this breakdown of how to calculate home equity.

Key Takeaways

• Usable equity is typically calculated as 80% of your property’s value minus your existing loan, not the full equity shown in property reports.
• You can use equity as a deposit for a second property without needing cash savings.
• Loan structure (separate vs cross-collateralised) directly impacts flexibility, tax outcomes, and risk.
• Interest on borrowed funds is generally tax-deductible if used correctly and kept separate.
• Comparing lenders, rather than defaulting to your current bank, can often save 0.30–0.60% per year on new debt.

What Is Home Equity (and Usable Equity)?

At its simplest, equity is the difference between what your property is worth today and what you still owe on your mortgage.

For example, if your Sydney home is worth $1.2 million and your loan balance is $500,000, your total equity is $700,000.

However, lenders don’t let you access all of that. Instead, they calculate something called usable equity, typically capped at 80% of your property’s value.

Using the same example:

• Property value: $1.2M
• 80% of value: $960k
• Existing loan: $500k
• Usable equity: $460k

This threshold exists because borrowing above 80% usually triggers Lenders Mortgage Insurance (LMI).

If you want a deeper breakdown, revisit how to calculate home equity.

Total Equity vs Usable Equity

This is where many borrowers get caught out.

You might think you have $700,000 available based on your property value, but in reality, the bank may only allow access to $460,000.

If you try to borrow above the 80% threshold, LMI applies to the new loan as well, which often makes the strategy less efficient.

How Much Equity Do You Need to Buy Another Property?

In most cases, you’ll need enough usable equity to cover:

• A 20% deposit
• Stamp duty and purchase costs

For example, buying a $700,000 investment property:

• Deposit (20%) = $140,000
• Costs ≈ $35,000
• Total needed: ~$175,000

This means your usable equity must cover at least $175,000.

For a full breakdown of deposits and costs, see how much deposit you need. 

How to Use Equity to Buy Another Property: Step-by-Step

Step 1: Get a Current Property Valuation

Online estimates are helpful as a starting point, but lenders rely on formal valuations when assessing how much you can borrow. These can include automated desktop valuations, kerbside assessments, or full internal valuations depending on the lender and property type.

This is where working with a broker can make a meaningful difference. Different lenders can produce different valuations on the same property, sometimes by tens of thousands of dollars. A higher valuation can directly increase your usable equity and borrowing capacity, so accessing multiple options upfront can materially improve your position.

Step 2: Calculate Your Usable Equity

Once you have a lender-backed valuation, you can apply the standard formula:

(Property Value × 80%) − Existing Loan

For example, if your home is valued at $1.3M with a $600k loan, your usable equity would be approximately $440k.

This figure determines how much you can contribute toward the deposit and costs of your next purchase. For a full breakdown, refer to how to calculate home equity.

Step 3: Choose the Right Loan Structure

At this stage, you’ll decide how the equity is accessed and how the new purchase is funded.

Most borrowers will either:

• Increase their existing loan (or split it) to access equity, then take a separate investment loan, or
• Refinance to a new lender to access equity and potentially secure a better rate and structure

There is also a third option, cross-collateralisation,  where both properties are tied together under one structure. While it can simplify the setup, it often reduces flexibility later and is generally avoided where possible.

The right structure depends on your long-term plans, not just what gets approved today. For a deeper comparison, see equity release vs refinancing.

Step 4: Apply, Settle, and Buy

Once your structure is confirmed, the next step is securing pre-approval for both the equity release and the new investment loan. This gives you clarity on your budget and reduces risk when making offers.

From there, you can begin your property search, exchange contracts once finance is in place, and proceed through to settlement.

Two of the most common issues at this stage are signing a contract before finance is fully approved, and valuations coming in below the purchase price. Both can be avoided with proper upfront structuring.

Loan Structures: Separate Loans vs Cross-Collateralisation

Cross-collateralisation is when both your existing home and your new property are used to secure all loans under one structure. From the bank’s perspective, everything is bundled together.

While this can seem convenient at the start, it creates limitations later:

• Selling one property requires the lender to reassess the entire portfolio
• Refinancing becomes more complex, as both properties are tied together
• The bank has greater control if property values change
• It can make tax tracking more difficult over time

In contrast, a separate loan structure keeps things clean:

• Your equity loan is secured only by your existing home
• Your investment loan is secured only by the new property

This gives you flexibility. You can refinance, sell, or restructure one property without impacting the other.

Many borrowers don’t realise the downside of cross-collateralisation until they try to make changes later. Setting up separate loans from the beginning avoids that issue and gives you far more control as your portfolio grows.

Tax Implications: Interest Deductibility and the ATO Purpose Test

One of the biggest advantages of using equity to buy an investment property is tax deductibility — but only if it’s structured correctly.

The Australian Taxation Office applies what’s known as the purpose test.

In simple terms:

• If the borrowed funds are used to generate income → interest is usually deductible
• If used for personal purposes → it’s not

The ATO makes it clear that deductibility depends on how the money is used, not what property secures the loan .

This is where mistakes happen.

If you:

• Mix personal and investment funds
• Park money in an offset and spend part of it
• Don’t keep clear records

… you can lose deductibility.

Best practice:

• Keep equity loans separate
• Use funds directly for the purchase
• Maintain a clean audit trail

For more, see tax benefits of an investment property and debt recycling.

Always speak to an accountant before proceeding.

A Worked Sydney Example

Existing home (Sydney Inner West):

• Value: $1.4M
• Loan: $600k
• Usable equity: $520k

New investment purchase:

• Property Price: $750k
• Deposit (20%): $150k
• Stamp duty + Costs: ~$40k
• Total required: $190k

In this scenario, the borrower uses $190k of their available equity to fund the deposit and costs. This is set up as a separate loan secured against their existing home.

They then take out a new investment loan of $600k (80% of the purchase price), secured against the investment property.

This structure keeps both loans separate, which is generally the preferred approach.

From a cash flow perspective, rental income (for example, ~$650 per week) helps offset repayments, while tax deductions may reduce the overall cost of holding the property.

The key takeaway is that no cash savings were required, the equity did the heavy lifting.

If you’re considering locations, see the best suburbs to invest in Sydney.

The Pros and Cons of Using Equity to Buy Another Property

Pros

One of the biggest advantages of using equity is that it removes the need to save a large cash deposit, which can take years in a rising market. Instead, you’re able to leverage the growth you’ve already achieved in your existing property.

This approach can accelerate wealth-building by allowing you to acquire another asset sooner. Because the borrowed funds are used for an income-producing property, the interest is generally tax-deductible when structured correctly, which can improve overall cash flow.

It also gives you control over timing, allowing you to act on opportunities without waiting to accumulate savings.

Cons

The trade-off is increased debt. You’re effectively leveraging your existing property to fund another purchase, which increases your exposure to interest rate movements.

If property values decline, your overall equity position may reduce, and if rental income drops or the property is vacant, cash flow can become tighter.

It’s also important to recognise that your existing home is being used as security. While this is standard practice, it does mean there is risk attached if the loan is not managed carefully.

Common Mistakes Sydney Property Investors Make

One of the most common mistakes is sticking with an existing lender without comparing options. Different lenders have different policies, valuations, and pricing, and not exploring alternatives can lead to a suboptimal outcome.

Another frequent issue is accepting cross-collateralisation because it’s presented as the easiest option. While convenient upfront, it can create significant limitations later when trying to refinance or sell.

Some borrowers also draw more equity than they need “just in case,” which can increase debt unnecessarily or push them into LMI territory.

Mixing personal and investment funds is another key mistake, particularly from a tax perspective. Once funds are blended, it becomes difficult to clearly separate deductible and non-deductible debt.

Finally, many investors underestimate costs or skip pre-approval altogether, which can lead to issues during the purchase process. Proper planning upfront avoids most of these problems.

Working with a Sydney mortgage broker can help you structure things correctly from the start.

Refinancing vs an Equity Top-Up: Which Is Better?

There are two main ways to access equity, and the right choice depends on your situation.

An equity top-up with your current lender is generally faster and involves less paperwork. However, you’re limited to that lender’s rates and policies, which may not be the most competitive.

Refinancing to a new lender requires more work upfront, including a full application and supporting documents. But it can allow you to secure a better rate, improve your loan structure, and separate your loans more effectively.

The key is to compare the long-term savings against the costs of refinancing, such as discharge fees, registration fees, and time involved. In many cases, a properly structured refinance delivers a better overall outcome.

If you’re considering this route, you can explore how to refinance your home loan or review whether refinancing to access equity makes sense in your situation before proceeding.

Speak to a Broker Before You Draw Down Equity

Using equity to buy another property is one of the most effective ways to build wealth through real estate, but it’s also one of the easiest strategies to get wrong.

The structure you put in place at the start will affect your flexibility, tax position, and borrowing capacity for years to come. Small decisions early on can have a significant impact later.

Before moving forward, it’s worth speaking to a Sydney mortgage broker who can compare lenders, structure the loans correctly, and ensure you’re not locking yourself into a setup that limits your options – especially for future investment loans.

Frequently Asked Questions

How much equity can I use to buy another property?

In most cases, you can access up to 80% of your property’s current value, minus your existing loan balance. Borrowing above 80% is possible, but it usually triggers Lenders Mortgage Insurance (LMI), which increases costs. For example: a $1M property with a $400k loan could allow access to around $400k in usable equity.

Can I use equity to buy a house with no deposit?

Yes, in effect, your equity can act as the deposit. Instead of saving cash, you borrow against your existing property to fund the 20% deposit. You’ll still need to cover stamp duty and purchase costs, but these can also come from equity if there’s enough available. The key is having sufficient usable equity and servicing capacity to support both loans.

Is it better to refinance or take an equity loan?

It depends on the gap between your current rate and what’s available in the market. A top-up with your existing lender is faster and simpler, but you’re limited to their pricing. Refinancing takes more work, but can deliver a better rate and cleaner structure. A broker will compare both options and factor in discharge and registration costs before recommending the best path. 

Is the interest tax-deductible when I use equity for an investment property?

Generally, yes, but only if structured correctly. The Australian Taxation Office applies a “purpose test”, meaning deductibility depends on how the borrowed funds are used. If the equity is used to purchase an income-producing property, the interest is typically deductible. However, mixing funds with personal spending can affect this, so it’s important to keep loan accounts separate and speak with an accountant. 

What is cross-collateralisation and should I avoid it?

Cross-collateralisation is when both your existing property and your new property are used to secure all loans under one structure. While it can simplify the initial setup, it reduces flexibility. Selling or refinancing one property can require lender approval across the entire portfolio. In most cases, keeping loans separate, even with the same lender, provides more control and is the preferred structure.

Do I need to use the same bank for the second property loan?

No, and in many cases, you shouldn’t. Using different lenders for your equity release and investment loan can improve flexibility, reduce risk, and give you more negotiating power. It also avoids having all your properties tied to one bank’s policies. A broker can compare multiple lenders to find the most suitable structure rather than defaulting to your current lender.