You've built up equity in your Inner West home and you're wondering if you can use it to buy a second property without selling or using all your savings.
You can, and it's one of the more common ways people get into the investment market around here. The process involves refinancing your current home loan to access the equity you've built up, then using that as a deposit for your next purchase. It's not complicated, but there are a few things that catch people out if they don't plan properly.
How Refinancing to Release Equity Actually Works
When you refinance your home loan to release equity, you're essentially increasing your loan amount based on the current value of your property. Most lenders will let you borrow up to 80% of your property's value without paying lenders mortgage insurance, though some will go higher if you're willing to pay the extra premium.
Consider a homeowner in Marrickville who bought a terrace five years ago for $1.1 million with a $200,000 deposit. They owed $900,000 initially, but have since paid it down to $750,000. If that property is now valued at $1.4 million, they've got $650,000 in equity. At 80% LVR, they could borrow up to $1.12 million against that property, meaning they could access around $370,000 in usable equity after paying off their existing loan. That's enough for a deposit on a second property, stamp duty, and the associated costs without touching their savings.
The LVR Calculation That Determines How Much You Can Access
Your loan to value ratio is the percentage of the property's value that you owe to the lender. It's the main factor that controls how much equity you can pull out. If you're sitting at 60% LVR and want to stay under 80%, you've got a 20% buffer to work with.
Not everyone wants to push right up to 80%, especially if interest rates are sitting where they are. Borrowing more means higher repayments, and if the investment property takes a few weeks to rent or you hit a gap between tenants, you need to be able to cover both loans comfortably. We regularly see people pull out less than they technically could, just to keep the monthly commitment manageable.
What Lenders Actually Look at When You Apply
Lenders assess your borrowing capacity based on your income, existing debts, living expenses, and the rental income you expect from the investment property. They'll use a rental assessment, usually around 80% of the expected rent, and they'll stress test your ability to service both loans at a higher interest rate than what you're actually paying.
If you're working with a property in Newtown or Petersham, rental yields are typically lower than you'd find further out, but capital growth tends to be solid. Lenders know this, and they'll still factor in the rental income even if it doesn't fully cover the mortgage on the second property. Your current home doesn't need to be positively geared either, as long as your income can service the total debt.
The Costs You Don't See Until You're Halfway Through
Refinancing to access equity isn't just about the new loan amount. You'll pay discharge fees on your old loan if you're switching lenders, application fees on the new one, valuation costs, and possibly legal fees depending on how the new loan is structured. Stamp duty on the second property is the biggest cost, and in New South Wales that's not small once you're buying anything over $500,000.
If the property you're buying is an investment property, you can usually claim some of these costs at tax time, but you still need the cash upfront. Some people roll these costs into the loan, which works if you've got enough equity, but it does increase what you're borrowing and what you'll be paying interest on.
Structuring the Loans So You Don't Lose Tax Deductions
One thing that gets missed a lot is loan structure. If you refinance your home and pull out equity to use as a deposit on an investment property, that equity portion needs to be kept separate from your main home loan. Otherwise, you lose the ability to claim the interest as a tax deduction.
The usual setup is to split your home loan into two parts: one for the original debt on your home, and one for the equity you've pulled out. The second part is what you use for the investment, and the interest on that portion becomes tax deductible. Your accountant will want to see it structured this way, and if it's not done properly from the start, it's a pain to fix later.
The Rental Income Assumption That Doesn't Always Hold
Lenders will factor in rental income when they assess your application, but they won't use the full amount. They'll typically take 80% of the expected rent and use that in their calculations. If you're buying in the Inner West, rental demand is strong, but vacancy periods still happen.
In a scenario where someone buys a two-bedroom unit in Dulwich Hill expecting $650 per week in rent, the lender will assess it at $520 per week. If the actual rent comes in lower, or if there's a gap between tenants, you need to be able to cover the shortfall from your own income. That's where theservicing calculation matters, and it's worth running the numbers with a mortgage broker in the Inner West before you commit to a purchase.
When It Makes Sense and When It Doesn't
Using equity to buy a second property works when your income can comfortably service both loans, when you've got enough buffer in your budget to handle vacancies or rate rises, and when the property you're buying is likely to hold or grow in value.
It doesn't work if you're already stretched on your current loan, if your income is variable or uncertain, or if you're buying something that's going to be hard to rent or sell down the track. The appeal of using equity is that you're not draining your savings, but if the numbers don't stack up on servicing, lenders won't approve it no matter how much equity you've got.
Call one of our team or book an appointment at a time that works for you. We'll run through your equity position, what you can borrow, and whether the investment you're looking at actually makes sense with the loan structure you'll need.
Frequently Asked Questions
How much equity can I access when refinancing to buy a second property?
Most lenders will let you borrow up to 80% of your property's current value without paying lenders mortgage insurance. The amount you can access depends on your property's value, how much you still owe, and your borrowing capacity.
Do I need to keep the equity loan separate from my home loan?
Yes, if you want to claim the interest as a tax deduction. The equity portion you use for the investment property should be split into a separate loan account so the interest is clearly linked to the investment, not your home.
Will lenders use the full rental income when assessing my application?
No, lenders typically assess rental income at around 80% of the expected rent. This accounts for vacancy periods and other rental costs, so you'll need to be able to service both loans even if the rental income is lower than expected.
What costs should I expect when refinancing to release equity?
You'll pay discharge fees on your old loan, application and valuation fees on the new one, and possibly legal fees. You'll also need to cover stamp duty and other purchase costs on the second property, which can be substantial.
Can I refinance to access equity if I'm already at 80% LVR?
You can, but you'd need to pay lenders mortgage insurance to go above 80%. Some lenders will allow you to borrow up to 90% or even 95% of your property's value, but the insurance premium increases your costs and needs to be factored into your budget.
