What Is Equity?
Equity is the difference between what your property is worth and what you owe on it. It's the portion of the property that's actually "yours."
Equity = Property Value − Loan Balance
Property worth $800,000, loan balance $480,000
Total equity: $320,000. But you can only access $160,000 (up to 80% LVR). The remaining $160,000 is the 20% buffer lenders require.
How Equity Grows
- Price growth, property values increase over time (the biggest driver)
- Paying down your loan, every P&I repayment reduces your balance
- Renovations, improving the property can increase its value (but not all renovations add equal value)
You buy a $700,000 property with a $560,000 loan (80% LVR).
Day 1: Equity = $140,000 (your deposit). Usable equity = $0 (you're already at 80%)
Year 3: Property grows to $790,000. Loan reduced to $530,000. Equity = $260,000. Usable equity = $102,000
Year 5: Property worth $870,000. Loan at $505,000. Equity = $365,000. Usable equity = $191,000
That $191,000 in usable equity could be a deposit on a second property worth up to $950,000.
Calculate Your Usable Equity
"Could Buy" assumes your usable equity is used as a 20% deposit. Actual capacity depends on serviceability. Talk to a broker.
Buying an Investment Property with Equity
This is how most property investors buy their second (and third, and fourth) property, they use the equity in their existing property as a deposit for the new one.
Sophie's situation:
Home value: $850,000
Home loan: $500,000
Usable equity: $180,000 ($850k x 80%. $500k)
Step 1: Sophie refinances her home loan and takes out a separate $180,000 equity release loan (now has 2 loan splits on her home)
Step 2: She uses the $180,000 as a 20% deposit on a $900,000 investment property
Step 3: She gets a new investment loan of $720,000 (80% of $900k)
Sophie's total position:
Loan 1 (home, P&I): $500,000 at 5.89%
Loan 2 (equity release for deposit, IO): $180,000 at 6.19%
Loan 3 (investment, IO): $720,000 at 6.19%
Total debt: $1,400,000
Total property: $1,750,000
The interest on Loans 2 and 3 is fully tax-deductible because the funds were used for investment purposes.
Cross-Collateralisation: Don't Do It
Cross-Collateralised (Avoid)
Both properties used as security for one big loan. The bank ties them together.
- Bank controls both properties
- Can't sell one without the other being reassessed
- Harder to refinance one property separately
- Bank can force a sale of either if you default
Standalone (Recommended)
Each property has its own separate loan with its own security. Completely independent.
- Full flexibility to sell, refinance, or restructure each property independently
- Better asset protection
- Cleaner tax reporting
- Can use different lenders for each property
This is critical: Many banks will default to cross-collateralisation because it gives them more security. Always insist on standalone loans for each property. Your broker should set this up correctly from day one.
Thinking about buying an investment?
We'll structure it properly from the start, standalone loans, tax-optimal splits, best rates.
Loan Structuring for Investors
This is where most people get it wrong, and where the most money is won or lost. The key principle:
Pay off non-deductible debt first. Keep deductible debt high.
Deductible vs Non-Deductible
- Non-deductible: Your home loan (owner-occupied). The interest isn't tax-deductible. You want this as low as possible, as fast as possible.
- Deductible: Your investment loan. The interest IS tax-deductible, the ATO lets you claim it against your income. Higher deductible debt = lower tax bill.
Bad structure (what most people do): Pay extra into the investment loan because "I want to reduce debt." This reduces your tax deductions while keeping your non-deductible home loan high.
Good structure: Put all extra cash into your offset account linked to your home loan. Keep investment loans on interest-only. Every dollar in offset reduces your non-deductible interest, while your deductible interest stays high.
The difference: On $800k total debt with a 37% tax rate, proper structuring can save you $5,000-$10,000+ per year in after-tax interest.
Why Offset (Not Redraw) for Investors
If you plan to turn your home into an investment property later (rent it out and buy a new home), never use redraw on the original loan.
The redraw trap: You have a $400k home loan. You pay it down to $300k, then redraw $100k for a holiday. If you later convert this to an investment property, the ATO says that $100k redraw was for personal use, so the interest on that $100k is NOT deductible. Your effective deductible balance is $300k, not $400k.
If you'd used an offset account instead, your loan balance would still be $400k, fully deductible when converted to investment. Same cash flow, massive tax difference.
Ideal Structure for an Investor
- Home loan (P&I): Variable with 100% offset. Put salary, savings, and cash here
- Equity release (IO): Separate split, used ONLY for investment deposit. Interest is deductible
- Investment loan (IO): At a different lender (standalone security). All interest deductible
- Investment rental income: Goes into your offset account on the home loan, NOT into the investment loan
Negative Gearing & Tax
Negative gearing is when your investment property costs you more than it earns. The loss is tax-deductible, meaning it reduces your taxable income.
Investment property: $700,000, loan $560,000 at 6.19%
Income: Rent $550/week = $28,600/year
Expenses:
Loan interest: $34,664
Council rates: $1,800
Insurance: $1,400
Property management (7%): $2,002
Maintenance: $1,500
Depreciation: $8,000
Total expenses: $49,366
Loss: $49,366. $28,600 = -$20,766
If you earn $120,000 salary, your taxable income drops to $99,234. At the 37% marginal rate, that saves you $7,683 in tax.
Real out-of-pocket cost: $20,766 loss. $8,000 depreciation (non-cash). $7,683 tax saving = $5,083/year or ~$98/week.
Rental Yield
Gross yield = Annual rent / Property price. A quick measure of return.
| Yield | Interpretation |
|---|---|
| 2-3% | Low yield (Sydney CBD apartments). Relying on capital growth |
| 4-5% | Balanced. Good cash flow + reasonable growth potential |
| 6%+ | High yield (regional areas). Strong cash flow but often slower growth |
What You Can Deduct
- Loan interest (on the investment portion only)
- Property management fees
- Council rates, water, strata/body corporate
- Insurance (landlord, building, contents)
- Repairs and maintenance (not capital improvements)
- Depreciation (building + fixtures), get a quantity surveyor report (~$700)
- Travel to inspect the property (limited)
- Advertising for tenants
Always get a depreciation schedule. For properties built after 1985, you can claim building depreciation (2.5% of construction cost per year) plus fixture depreciation. On a $500k investment property, depreciation alone could save you $3,000-$8,000/year in tax. The $700 surveyor report pays for itself many times over.
Scaling From 1 to Multiple Properties
Here's the roadmap most property investors follow. The challenge isn't the first property, it's the second and third, where serviceability becomes the bottleneck.
The Portfolio Growth Roadmap
Year 0, Property 1 (your home): Buy for $700k with $140k deposit. Loan: $560k.
Year 3, Property 2 (investment): Home now worth $810k. Loan at $520k. Usable equity: $128k. Buy a $600k investment with $120k deposit. New investment loan: $480k.
Year 6, Property 3: Home worth $920k. Investment worth $710k. Combined equity now substantial. Buy a $550k unit. But now serviceability is tight, you need the rental income from Property 2 to help qualify, and lenders apply an assessment rate 3% above actual.
Year 8+: With 3 properties, serviceability may be maxed. Options: increase income, wait for rate cuts, pay down non-deductible debt, or use a lender with more generous serviceability.
Why Serviceability Gets Harder
Each new investment loan reduces your borrowing capacity, even though the property generates rent:
- Lenders only count 80% of rent as income
- But they add 100% of the new repayment as a liability
- They assess at the actual rate + 3% buffer (not the real rate)
- Each property adds council rates, insurance, and maintenance as expenses
The 80/100 gap: A $600k investment loan at 9% assessment rate (6% + 3%) costs $4,830/month in the lender's calculation. The rent ($500/week x 80% = $1,733/month) only offsets about a third. Each investment property actually reduces your borrowing power, even though in reality, the cash flow might be close to neutral.
Strategies for Scaling
- Interest-only on investments, keeps repayments lower, preserving serviceability
- Use different lenders, each lender has different serviceability models. A broker can find the most generous one for your situation
- Pay down your home loan aggressively, every dollar off your non-deductible home loan improves serviceability
- Increase income, pay rises, side income, or adding a co-borrower
- Buy higher-yield properties, better cash flow = less impact on serviceability
Want a portfolio strategy session?
Our brokers help investors structure loans for maximum growth potential.
Knowledge Check
Your property is worth $900,000 and you owe $550,000. Your usable equity at 80% LVR is:
Why should investors use an offset account instead of making extra repayments via redraw?
Why does each investment property actually reduce your borrowing power, even though it generates rental income?
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Module 5 Complete!
You now understand equity, loan structuring, and building a portfolio. Last module: the fine print that actually matters.