Your home has likely increased in value since you bought it. That growth sitting in your property can become the deposit for your next purchase without selling or saving for years.
Using equity to fund an investment property means borrowing against the value you've already built up in your home. Lenders typically allow you to access up to 80% of your property's current value, minus what you still owe. The difference becomes available funds you can use as a deposit, covering stamp duty and other upfront costs on a second property. You're not taking cash out in most cases, you're increasing the loan on your existing home and using those funds to secure investment property finance on another asset.
How Equity Release Works in Dulwich Hill
Your home is revalued by the lender, often using an automated valuation or desktop appraisal rather than a full inspection. If your property is worth $1.2 million and you owe $600,000, you have $600,000 in equity. Lenders will typically let you borrow up to 80% of the property's value, which is $960,000. Subtract what you owe, and you have access to $360,000 in usable equity.
Consider someone who bought a semi in Dulwich Hill several years ago near Dulwich Grove. The property has appreciated, and they now owe less than half its current value. They want to buy a unit in Kingsgrove as a rental. Instead of saving another deposit from scratch, they refinance their Dulwich Hill home to release $150,000. That covers the deposit, stamp duty, and settlement costs on the investment property. Both loans sit separately, one secured by the family home and one by the new rental property.
The key number is loan to value ratio. Going above 80% usually means paying Lenders Mortgage Insurance, which adds thousands to the cost and doesn't protect you. Staying at or below 80% across both properties keeps the structure clean and avoids that expense.
Mistake One: Not Structuring Loans Separately
Keep your home loan and your investment loan as separate accounts with separate purposes. Mixing them creates problems at tax time because you can only claim interest on the portion of the loan used to generate income. If you refinance your home, pull out equity, and dump it all into one loan account that you then use for both personal expenses and the investment deposit, the Australian Taxation Office won't let you deduct the full interest amount.
Set up the equity release as a split or separate loan facility. One loan sits against your home for personal use. The second loan, secured by the same property or the new one, is used exclusively to purchase the investment. That way, every dollar of interest on the investment portion is claimable. Your accountant will thank you, and you'll avoid spending hours reconstructing transactions during tax season.
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Book a chat with a Finance & Mortgage Broker at Little Bull Finance today.
Mistake Two: Underestimating Holding Costs on a Negatively Geared Property
Most investment properties don't cover their own costs in the early years. Rental income rarely exceeds the combined mortgage repayment, council rates, strata fees if applicable, insurance, and maintenance. That shortfall is negative gearing, and it gives you a tax deduction, but it also means you're funding the gap from your own income every month.
In our experience, buyers focus on the deposit and forget to model the ongoing cost. A unit in the Inner West might rent for $650 per week. That's $2,817 per month. If your loan repayment alone is $2,400, you're left with $417 to cover strata fees, council rates, landlord insurance, property management, and repairs. The shortfall might be $500 to $800 per month depending on the property. Over a year, that's $6,000 to $9,600 out of your pocket.
Lenders assess this when calculating your borrowing capacity. They'll add the investment loan repayment to your existing commitments and reduce the rental income by a vacancy rate and other assumptions. Your borrowing capacity might be lower than expected, especially if you're already carrying a decent home loan. Running the numbers before you start looking at properties helps you understand what you can actually afford to hold, not just buy.
Variable Rate vs Interest Only Investment Loans
Most investors choose interest only repayments for the first few years. You're only paying the interest portion, not reducing the loan balance. This keeps repayments lower and maximises your tax deductions since you're not paying down principal. It also frees up cash flow to cover the holding costs or save toward the next deposit.
Variable rates give you flexibility. You can make extra repayments if you want to, and you're not locked in if you decide to sell or refinance. Fixed rates offer certainty for a set period, which can help with budgeting, but they come with restrictions. Break costs apply if you exit early, and most fixed loans don't allow extra repayments above a small threshold.
Consider a Dulwich Hill buyer who already owns a townhouse and wants to add a second property to their portfolio. They release equity and set up an interest only loan on the investment at a variable rate. Repayments sit at around $2,200 per month. Rent covers $2,400. The property is slightly positive on paper, but once strata, rates, and insurance are included, it's costing them $400 per month. They're comfortable with that because their income supports it, and the tax deductions bring the after-tax cost down. They've kept the loan variable so they can refinance or sell without penalty if their circumstances change.
Mistake Three: Ignoring Serviceability When You Already Have Debt
Lenders don't just look at your equity. They assess whether you can service both loans based on your income, existing debts, and living expenses. Even if you have $300,000 in available equity, the lender might not approve a loan if your income doesn't support the repayments on both properties.
Serviceability is calculated at a higher interest rate than you'll actually pay, often around 3% above the actual rate. If you're applying for a loan at 6%, the lender might assess you at 9%. They also apply a haircut to rental income, assuming the property will sit vacant for a portion of the year and that you'll incur management and maintenance costs. If the property rents for $600 per week, they might only count $420 in the serviceability calculation.
This is where buyers get caught. They assume equity is enough. It's not. Your income needs to cover the gap, and if you're already stretched on your home loan or have car loans and credit cards, the lender's appetite drops quickly. Paying down smaller debts and increasing your income, even temporarily, can make the difference between an approval and a decline.
Mistake Four: Not Reviewing Your Home Loan Before Refinancing for Equity
If your home loan hasn't been reviewed in a few years, you're likely paying more than you need to. Refinancing to access equity is the ideal time to restructure your entire position. You can move to a lender with lower rates, remove unnecessary fees, and set up loan splits that separate your personal and investment loan balances.
We regularly see clients sitting on rates that are 0.5% to 1% higher than what's currently available. On a $600,000 loan, that's $3,000 to $6,000 per year in unnecessary interest. Combine the refinance with the equity release, and you're solving two problems at once. The process is the same whether you're pulling out $50,000 or $200,000, so there's no reason not to review the whole structure.
A loan health check before you start looking at investment properties gives you a clear picture of what you can access, what it will cost, and whether your current loan is holding you back. It also means you're not scrambling to organize finance once you've found a property you want to buy.
Your next property doesn't require years of saving if you already own a home in Dulwich Hill. The equity is there, the loan structures exist, and the tax treatment supports it. What matters is setting it up correctly from the start so you're not fixing mistakes later or leaving money on the table. Call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
How much equity can I use from my Dulwich Hill home to buy an investment property?
Lenders typically allow you to borrow up to 80% of your property's current value, minus what you still owe. The difference is your usable equity. Going above 80% usually triggers Lenders Mortgage Insurance, which adds significant cost without protecting you.
Should I keep my home loan and investment loan separate?
Yes. Keeping them as separate loan accounts ensures you can claim all the interest on the investment loan as a tax deduction. Mixing personal and investment borrowing in one account makes it difficult to prove which interest is claimable and can lead to issues with the ATO.
What is negative gearing and how does it affect my cash flow?
Negative gearing occurs when your rental income is less than the costs of holding the property, including loan repayments, rates, insurance, and maintenance. The shortfall is tax deductible, but you need to fund the gap from your own income each month, often $500 to $800 or more.
Can I still borrow if I already have a large home loan?
It depends on your income and existing debts. Lenders assess serviceability by calculating whether your income can support both loans at a higher interest rate than you'll actually pay. Even with available equity, you may not be approved if your income doesn't support the combined repayments.
Should I choose interest only or principal and interest for an investment loan?
Most investors choose interest only for the first few years to keep repayments lower and maximise tax deductions. This frees up cash flow to cover holding costs or save for future investments. You can switch to principal and interest later if your strategy changes.
