Usable equity is not the same as the equity you hold. Lenders generally work to 80 per cent of a property's current value, less what you still owe. Anything above that line sits behind lenders mortgage insurance. That is why the figure a lender will work with is usually smaller than the one in your head.
Using Equity to Buy an Investment Property
Where does equity come from?
Where does equity come from?
Four places, and only one of them is in your control from month to month. Loan repayments reduce what you owe. Extra payments do the same faster. Improvements can lift the value. Market growth lifts it without any effort from you, and in a falling market takes it back the same way.
How is usable equity worked out?
How is usable equity worked out?
Take the property's current value, apply the lender's 80 per cent line, then subtract the loan still outstanding. What is left is the usable figure. The equity on paper is a different and larger number, and it is the one most people plan around.
An illustration, using the round numbers from the chart below rather than a real client position:
An illustration, using the round numbers from the chart below rather than a real client position:
| Line | Amount |
|---|---|
| Property value today | $700,000 |
| Loan still owing | $400,000 |
| Equity on paper | $300,000 |
| The lender's 80 per cent line | $560,000 |
| Usable equity | $160,000 |
The gap between $300,000 and $160,000 is the part that has usually already been spent in someone's head. Planning from the paper figure is where most equity conversations come unstuck.
Why is the lender's number lower than yours?
Why is the lender's number lower than yours?
Three reasons, and they stack.
The first is the 80 per cent line itself. Borrowing above it is possible, and it brings lenders mortgage insurance with it, which is a real cost rather than a technicality. We cover when paying it is a reasonable call in our guide to lenders mortgage insurance.
The second is the valuation. A lender values the property itself, and that figure can land below a portal estimate or a neighbour's sale price. The valuation is the number the calculation runs on, not your estimate of it.
The third is the one that catches people furthest along: equity and borrowing power are two separate tests. Releasing equity tells you where a deposit can come from. Whether your income supports the larger total debt is assessed separately, against the lender's own buffers. Clearing one and failing the other is ordinary.
The first is the 80 per cent line itself. Borrowing above it is possible, and it brings lenders mortgage insurance with it, which is a real cost rather than a technicality. We cover when paying it is a reasonable call in our guide to lenders mortgage insurance.
The second is the valuation. A lender values the property itself, and that figure can land below a portal estimate or a neighbour's sale price. The valuation is the number the calculation runs on, not your estimate of it.
The third is the one that catches people furthest along: equity and borrowing power are two separate tests. Releasing equity tells you where a deposit can come from. Whether your income supports the larger total debt is assessed separately, against the lender's own buffers. Clearing one and failing the other is ordinary.
What can equity do, and what can it not do?
What can equity do, and what can it not do?
It can fund a deposit and the purchase costs on a further property. It can fund a buffer, which matters more in a market where values have been falling than in one where they have been rising. It can let a loan be restructured so that interest sits against an income-producing asset, which is the mechanism behind debt recycling.
It cannot increase your income, it cannot remove the serviceability test, and it cannot make a weak asset a good one. A second property bought with equity carries exactly the same risk as one bought with cash. The deposit's origin changes nothing about whether the asset was worth buying.
It cannot increase your income, it cannot remove the serviceability test, and it cannot make a weak asset a good one. A second property bought with equity carries exactly the same risk as one bought with cash. The deposit's origin changes nothing about whether the asset was worth buying.
Which comes first, the strategy or the structure?
Which comes first, the strategy or the structure?
The order is the whole thing. The questions that come before any equity calculation are which problem the next purchase solves, whether that is growth, cash flow or security, and what the purchase has to do inside the portfolio you already hold. Our guide to property portfolio sequencing works through how that order is set.
Structure follows that answer. When it leads, the available equity decides the purchase, which is how people end up owning the property they could fund rather than the one the plan needed.
Structure follows that answer. When it leads, the available equity decides the purchase, which is how people end up owning the property they could fund rather than the one the plan needed.
What three questions should you answer before accessing equity?
What three questions should you answer before accessing equity?
If the valuation comes back ten per cent under your estimate, does the plan still work, or does it only work at the number you hoped for?
What buffer is left after the purchase and the costs, and how many months of holding does that buffer cover if a tenant leaves or a rate moves?
Is the next purchase the right one for the portfolio, or the one the available equity happens to reach?
What buffer is left after the purchase and the costs, and how many months of holding does that buffer cover if a tenant leaves or a rate moves?
Is the next purchase the right one for the portfolio, or the one the available equity happens to reach?
Where does this sit in a portfolio plan?
Where does this sit in a portfolio plan?
Equity is one input into a sequence, not a strategy on its own. Working out what a property has to do before working out how to fund it is the part we are engaged for, and it is what a buyers agent for investment property is doing before any numbers are run.
The lending itself sits with your own broker or lender. We do not arrange finance and we are not credit advisers, so the questions above are the ones worth taking to them rather than answers to bring back from us.
The lending itself sits with your own broker or lender. We do not arrange finance and we are not credit advisers, so the questions above are the ones worth taking to them rather than answers to bring back from us.
Frequently asked questions
Frequently asked questions
How much equity do you need to buy an investment property?
There is no single figure, because two tests run at once. The first is how much usable equity the lender will release, which is generally 80 per cent of the property's value less what you owe. The second is serviceability, which is whether your income supports the larger total debt. Clearing the first test and failing the second is common.
Is usable equity the same as a deposit?
It can be used as one, but it is not the same thing. A cash deposit reduces what you borrow. Equity released from another property increases what you borrow against that property. The deposit arrives either way; the difference is what the total debt looks like afterwards.
Does using equity mean you can borrow more?
Not on its own. Equity answers the question of where the deposit comes from. Borrowing power is a separate assessment based on income, expenses, existing debt and the lender's own buffers. Those two numbers move independently, which is why a plan built on equity alone can stall at the application.
Is it better to use equity or save a cash deposit?
They solve the same problem differently and the trade-off is personal, so this is a question for you and your broker rather than one with a general answer. The questions worth asking are what buffer each option leaves you, how each affects your total debt, and whether waiting to save changes what you can buy.
General information only. We're licensed buyer's agents, not financial or tax advisers, so please check anything that affects your money with your own adviser.
Talk it through
Talk it through
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About the author
Rasti Vaibhav is the founder of Get RARE Properties, an independent buyer's agency for property investors. He is a CFA Charterholder and spent more than nine years managing institutional portfolios at Westpac and AMP Capital before founding the firm in 2020. He sits on the REINSW Buyers' Agent Chapter Committee and is the author of The Property Wealth Blueprint.
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