Only the usable part of your home equity can go towards a second property. That figure, plus your ability to service a bigger loan, decides how far you can go.
If you own a home on the Bellarine Peninsula, from Ocean Grove to Queenscliff, you may be wondering whether the equity you have built can fund your next purchase. It often can, but the numbers need checking first.
What Is Usable Equity and How Do You Work It Out?
Usable equity is usually 80% of your home's value minus what you still owe. If your lender values your home at a certain amount and you owe half of it, your usable equity is about 30% of that value.
The valuation is the lender's, not the agent's. A bank uses its own valuation, which might be less than what a real estate agent says your property is worth. A lower valuation hits harder than it looks. A valuation $100,000 under expectation cuts your usable equity by $80,000.
The 80% line matters because of mortgage insurance. Lenders mortgage insurance (LMI) is a one-off cost that usually applies when the amount borrowed exceeds 80% of the property's value. You can borrow past 80% with some lenders, but the premium and the extra risk are the trade-off.
Equity Does Not Replace Borrowing Capacity
Equity can cover your deposit, but it does not raise your income. Equity does not increase your income, so it must be paired with borrowing capacity. Access to equity is still assessed against income and existing commitments.
That means you can have plenty of equity and still be limited by your repayments. Check your borrowing capacity before you start looking at properties, and use a home loan calculator to test what a larger debt does to your monthly budget.
Your deposit for purchase also needs to cover more than the deposit itself. Costs such as stamp duty, legal fees and inspections sit on top of the deposit. Build these buying costs into the amount you release from your home.
How to Use Equity to Buy a Second Home: A Worked Example
You release only the amount you need, test the repayments, and keep a buffer. Here is how that could look for an illustrative buyer.
Consider a homeowner who wants to buy an investment property. The lender's valuation gives them $150,000 of usable equity. That covers the deposit and most of the buying costs, but the bank will still assess whether their income supports the extra debt.
The repayment test comes first. At an illustrative rate of 6.75% p.a. over 30 years, $150,000 of extra borrowing costs about $973 a month on principal and interest. On interest-only, at the same rate, it is about $844 a month, and the balance does not fall.
Our buyer compares those figures with their monthly budget and decides to release $130,000 instead of the full amount, leaving the remaining $20,000 of usable equity unreleased. Unreleased equity is not cash, and it still needs lender approval to access. If the buyer wants a cash buffer for vacancies and repairs, they would need to hold it in an offset account or savings, funded from additional money or a deliberate extra release. The result is a lower repayment and a purchase that still works. Actual repayments depend on your lender, loan term and rate.
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Should You Use a Separate Loan Split for the Equity?
A separate loan split is usually the cleaner way to release equity. The released amount sits in its own account, apart from your home loan, so you can see exactly what it costs.
There is a tax angle as well. A separate split for the investment portion keeps the deductible and non-deductible debt clean. Whether any interest is deductible depends on your situation, so speak with your accountant before you sign anything.
The trade-off is more loan accounts to manage. If you choose interest-only on the new split, repayments are lower at first, but the debt stays the same until you switch to principal and interest. When you do switch, the repayments rise because the same debt is paid off over a shorter remaining term. Our investment loans page covers the options, and the home loans page explains how your existing loan fits in.
The Costs and Risks of Borrowing Against Your Home
Using equity means your current home secures the new debt. If a new property sits vacant for a few months or needs emergency repairs, you still have to make all of your loan payments on time.
Values can also move against you. If prices in your area drop, your equity could shrink, and this risk is greater if the new property also loses value. Your pre-approval is not a promise that the numbers will stay the same. Valuations and lender policy can change between approval and settlement.
If you are not sure where you stand, a loan health check on your current loan is a sensible first step. It shows your balance, your likely usable equity and whether your current lender is still suited to a bigger structure.
A broker can help buy with the right structure from the start. Call one of our team or book an appointment at a time that works for you. We work with homeowners across the Bellarine Peninsula and can run your equity and repayment numbers before you make an offer.
Frequently Asked Questions
How much equity can I use to buy a second home?
Usable equity is usually 80% of your home's value minus your loan balance. Your lender uses its own valuation, so the figure may differ from an agent's estimate.
Is having equity enough to buy another property?
No. Equity can fund the deposit and buying costs, but the lender still assesses your income and existing commitments. Your borrowing capacity decides whether the loan is approved.
Should I use a separate loan split for the equity?
A separate split keeps the released funds apart from your home loan, which makes costs and records clearer. It means more accounts to manage, and you should check tax treatment with your accountant.
What are the main risks of using home equity to buy a second home?
Your current home secures the new debt, and you still have to make repayments during vacancies or repairs. If property values fall, your equity can shrink.
