Using equity in your home to buy an investment property

Home valued at $1,000,000 with a $450,000 loan: usable equity is $800,000 less $450,000, which is $350,000. Target investment property at $650,000: deposit of $130,000 plus roughly $35,000 of stamp duty and costs, so $165,000 of equity is released and $185,000 remains available for the next purchase. The investment loan is $520,000 at 80 per cent. Total new borrowing is $685,000 and total debt is $1,135,000, which has to service on your income plus the shaded rent.

The equity release is a separate split on the home, in your name, for investment purpose, and its interest is deductible because the funds buy the investment property. The home loan portion is untouched and remains non-deductible. The investment loan sits on the investment property. Nothing is cross-secured, so each property can be sold or refinanced independently, and the tax position is clear. Many investors use two different lenders for the two loans.

Cross-collateralisation: letting one lender take both properties as security for one loan. It is simpler on the day and a problem for years: selling one property requires the lender's consent and a revaluation of the other, and the lender controls the whole position. Mixing funds: paying the released equity into the home loan's redraw or a personal account, then paying the deposit from there. The deductible and non-deductible money is now mixed and the ATO requires apportionment forever. Keep the split separate and pay the deposit from it directly.

The combined debt is assessed at the buffered rate with the new rent shaded. Home equity is rarely the constraint on a first investment; income is. If the numbers are tight, interest only on the investment debt, a longer term, or a lender that shades rent at 90 per cent can be the difference. Test serviceability before ordering the valuation.