Why Should You Use Home Equity to Buy a Second Home?

If your Mandurah home has risen in value, the equity sitting in that property can become the deposit for your next purchase.

You don't need to sell your current home or save another full deposit from scratch. Instead, you can borrow against the value you've already built, whether you're buying an investment property or a second place to live. The equity you've accumulated through price growth and mortgage repayments can give you access to borrowing capacity you might not realise you have.

How Home Equity Works When Buying a Second Property

Home equity is the difference between what your property is worth and what you owe on it. If your home is worth more than your mortgage balance, that difference is equity you can use.

Lenders typically let you borrow up to 80% of your property's value without paying lenders mortgage insurance. If your home is now worth more than when you bought it, you may have enough equity to use as a deposit on a second property without needing to access cash savings. In our experience, buyers in Mandurah often underestimate how much equity has built up over the past few years, particularly in suburbs like Halls Head, Erskine and Lakelands where values have climbed steadily.

Calculating Your Available Equity

Your available equity is calculated by taking 80% of your current property value, then subtracting what you still owe on your mortgage.

Consider a buyer who owns a home in Erskine now worth $800,000, with $450,000 remaining on the mortgage. Eighty per cent of $800,000 is $640,000. Subtract the $450,000 loan balance, and the buyer has $190,000 in accessible equity. That's enough to cover a deposit and purchase costs on a second property without needing to liquidate other assets or wait to save more cash.

The calculation changes if you're willing to pay lenders mortgage insurance, which can allow you to borrow up to 90% or sometimes 95% of your property's value. That increases your accessible equity but adds an insurance premium to your loan costs. Most buyers prefer to stay at or below 80% to avoid that cost.

Can You Buy an Investment Property Without Selling Your Home?

You can buy an investment property without selling your current home by using the equity in that home as your deposit.

This is one of the most common ways property investors build a portfolio. You keep your existing home, continue living in it or renting it out, and use the equity to fund the deposit on a second property that generates rental income. The rental income from the new property can help cover some or all of the additional loan repayments, depending on the yield and your loan structure.

For buyers in Mandurah, this approach works particularly well when your current home is in a suburb with strong capital growth but you want to buy investment property in a location with higher rental yields. Your equity stays tied to your existing home while the new property starts generating income.

What Lenders Look at When You Borrow Against Equity

Lenders assess your income, expenses, and existing debts to determine how much you can borrow on top of your current mortgage.

Even if you have plenty of equity, the lender still needs to be confident you can service both loans. They'll look at your household income, any existing loan repayments, living expenses, and other financial commitments like credit cards or car loans. They'll also factor in the rental income from the new property if you're buying an investment, though most lenders only count 80% of the expected rent to allow for vacancy periods and costs.

If you're purchasing an investment property, lenders will usually assess your borrowing capacity using the rental income from that property at 80% of the expected rent, plus your current income, minus all your existing commitments. That means a property with strong rental income can improve your borrowing position even if you're already carrying a mortgage.

Refinancing to Access Equity

If your current lender won't let you access your equity or the rate and features aren't suitable for a second purchase, you can refinance your existing loan to release equity and move to a more appropriate structure.

This might involve increasing your loan amount with your current lender or switching to a new lender entirely. Refinancing lets you pull equity out as cash, which you can then use as a deposit on your second property. It can also be an opportunity to review your loan structure, particularly if you're moving from an owner-occupied loan to a situation where your first property becomes an investment and your second property becomes your home.

We regularly see this with buyers in suburbs like Dudley Park and Falcon who want to upgrade to a larger home while keeping their current property as an investment. Refinancing lets them access equity, adjust their loan structure, and set up separate loans for each property to keep tax deductions clear.

Loan Structure When Using Equity for a Second Purchase

You'll typically need two separate loans - one secured against your existing property and one secured against the new property you're buying.

Even though you're using equity from your first home, the new home loan to buy your second property is a standalone loan secured by that new property. Keeping the loans separate makes it easier to manage your finances, claim tax deductions correctly if one property is an investment, and eventually sell or refinance one property without affecting the other.

If you're turning your current home into an investment and buying a new home to live in, the loan on your original property becomes an investment loan and the interest may be tax deductible. The loan on your new home is an owner-occupied loan, and the interest is not deductible. Keeping them separate from the start avoids complications later.

Costs Involved When Buying with Equity

You'll still need to budget for stamp duty, legal fees, building and pest inspections, and loan establishment costs when buying your second property.

Even though you're not pulling together a cash deposit from savings, these costs still apply and need to be covered either from your accessible equity or from other funds. Depending on the purchase price and whether you qualify for any concessions, stamp duty alone can run into the thousands. Legal fees, inspections, and lender costs add another few thousand on top.

If you're buying an investment property in Mandurah, you won't qualify for first home buyer concessions, so you'll pay full stamp duty at the standard rate. That's worth factoring into your equity calculation so you know exactly how much you need to access.

Risks to Consider When Borrowing Against Equity

Borrowing against your home equity increases your overall debt, and if property values fall, you could end up with less equity than you started with.

You're also taking on additional loan repayments, which means your monthly commitments go up. If your income drops, interest rates rise, or the investment property sits vacant for a period, you need to be able to cover both loans from your own income. That's why lenders assess your serviceability so carefully before approving the loan.

Another consideration is that if you're borrowing close to 80% of your existing property's value, any dip in that property's value could push you over 80% loan-to-value ratio, which might limit your options if you need to refinance or access more equity later. It's worth keeping a buffer where possible, particularly if you're planning to buy multiple properties over time.

Call Mel today or book an appointment at a time that works for you to discuss your borrowing options and work out how much equity you can access for your next home purchase.

Frequently Asked Questions