Property investing is popular in Australia, with over 2.2 million Australians owning investment properties. Yet according to the Australian Taxation Office (ATO), 71% of investors hold just one property.
One possible reason? Saving a large deposit can be challenging.
However, a smarter alternative is leveraging your equity – the value you’ve built in your current property – to fund your next investment, enabling you to grow your portfolio sooner, without needing substantial cash upfront.
What’s equity?
Equity is the difference between your property’s current market value and the outstanding balance on your mortgage.
For example, if your property is valued at $800,000 and you owe $500,000 on your mortgage, your equity will be $300,000.
However, it’s unlikely you’ll be able to access all of that equity.
That’s because most lenders typically cap the portion of your equity they’re willing to lend against. This is typically 80% of the value of your property minus what you still owe on the home loan, and is known as “useable equity”.
So, using the example above, 80% of your $800,000 property is $640,000. Subtracting what you still owe ($500,000) leaves you with $140,000 in usable equity.
Lenders set this limit to protect against market fluctuations and ensure your loan remains secured even if property values drop.
How do you build home equity?
The equity in your mortgage can be built up in two main ways:
- Capital growth: As the market value of your property increases over time, your equity grows.
- Principal reduction: As you pay down your mortgage, you reduce the outstanding loan amount, increasing your equity.
How can you access equity?
The most common way to unlock equity is by refinancing your existing mortgage. This is when you replace your current home loan with a new loan for a higher amount, allowing you to access the difference as usable funds.
This process starts with your lender conducting a property valuation to determine your home’s current market value. Once this is established, they will calculate your usable equity based on the 80% loan-to-value ratio. If you meet the borrowing criteria, your lender will approve a new mortgage for a higher amount, allowing you to withdraw the equity as cash.
Once accessed, these funds can be used towards your next investment property.
What can you use equity for?
As a property investor, equity can be a useful tool to expand your property portfolio.
Instead of saving for a new deposit, you can use equity to fast-track your next purchase. This allows you to expand your property holdings sooner, without needing a large amount of upfront cash.
Equity can also help you diversify your portfolio. For example, you might invest in both residential and commercial properties or expand into different locations. Alternatively, you could choose a newly built property instead of an existing one. Expanding in different ways can help spread risk and increase long-term returns.
What are the benefits of using equity for property investment?
Choosing to access your equity to build your property portfolio instead of taking out a bigger mortgage or using other sources of funds can be beneficial:
- Leverage: This strategy allows you to use existing assets to acquire more properties, increasing your potential returns.
- Tax advantages: If you borrow money to buy an investment property that generates rental income, you can claim a deduction for the interest you pay when you submit your return to the ATO.
- Wealth accumulation: As property values appreciate – which they are forecast to do in 2025 by up to 7.8% according to KPMG – your equity and net worth can grow substantially.
While using equity is a powerful tool, it does come with risks.
One of the biggest risks is cross-collateralisation. If you use equity from your existing property to secure your next investment, both properties become linked. This means that if you run into financial trouble, the lender could enforce the sale of both properties to recover the debt.
To mitigate this risk, consult a qualified mortgage broker who can guide you through different loan structuring options to protect your assets.
Market fluctuations can also affect your equity position. While property values are forecast to rise in 2025, they can also decline, which may impact your overall investment strategy. If values drop significantly, you might find yourself unable to refinance or borrow against your property in the future.
Taking on additional debt can also increase financial pressure, especially if interest rates rise. If your rental income isn’t enough to cover your higher loan repayments, it could strain your cash flow. This is why it’s important to have a well-thought-out financial strategy before using equity to invest.
Key factors to consider when accessing equity
Before refinancing to access equity, it’s important to assess whether you can afford the increased loan repayments. Reviewing your income, expenses, and existing financial commitments can help determine if this strategy is viable for you.
It’s also essential to have a clear investment plan. Knowing how you will use the equity and ensuring it aligns with your long-term goals can help you make informed decisions.
Finally, consider the state of the property market. A property investment strategist can provide insights into current trends, helping you find the right property and location to invest in.
How savvy investors maximise equity
Savvy property investors don’t just access equity once – they leverage it multiple times to expand their portfolios strategically. This involves a cycle of buying, refinancing and reinvesting, allowing them to grow their holdings without repeatedly saving large deposits.
For example, an investor might purchase a property, wait for it to increase in value or actively add value through renovations, then refinance to access the newly created equity.
They then use this equity as a deposit for their next property. The rental income from existing properties helps cover loan repayments, reducing out-of-pocket expenses and making it easier to secure further financing.
As each property gains value, they repeat this process, unlocking more equity from multiple properties and scaling their portfolio faster.
To minimise risk, experienced investors avoid cross-collateralisation by structuring loans separately for each property, giving them greater flexibility when refinancing or selling.
They also maintain a financial buffer – such as an offset account or redraw facility – to manage cash flow and cover unexpected costs. By regularly reviewing property values, loan structures and market conditions, they keep themselves in a strong position to reinvest and grow their wealth.
Looking to expand your property portfolio? With research-backed insights and expert guidance, the property investment strategists at Safore can help you make informed decisions and build long-term wealth with confidence. Contact Safore today on 1300 69 77 67 or click here.
