The easiest way to use equity for investment property

Your home equity can fund your next property without liquidating other assets.

That statement matters if you own property in Merrylands and want to expand into investment without selling your current home or drawing down cash reserves. Accessing equity through refinancing or a second mortgage converts the value sitting dormant in your property into a deposit for a rental dwelling. The mechanics are straightforward, but lending conditions in mid-2026 mean the path from equity release to settlement requires more documentation and a sharper focus on income than it did two years ago.

How equity release works for investment purchases

You borrow against the value you have built in your existing property. Lenders assess your home at current market value, subtract what you still owe, and allow you to access a portion of the difference. Most lenders cap this at 80 per cent of the property's value to avoid Lenders Mortgage Insurance, though some allow higher loan to value ratios with LMI added to the loan.

Consider a property owner in Merrylands who purchased years ago near Stockland Mall and built considerable equity as values rose. The property is now valued with enough unencumbered equity to cover the full deposit and costs for a second dwelling. Rather than save additional cash, they refinance the existing loan to release that equity. The released funds then go toward purchasing a unit closer to Parramatta, where rental demand from hospital and university workers stays consistent. The borrower now holds two properties with one existing mortgage and one new investment loan.

What lenders assess when you apply

Lenders examine your capacity to service both loans simultaneously. The debt-to-income cap introduced in February limits how many new loans can be written above six times annual income. If your salary sits near that threshold, the lender may reduce the amount they will advance or require you to lower other debts before proceeding.

Income verification has also tightened. Self-employed borrowers and business owners often need two years of financials, and some lenders now request interim profit and loss statements if the last lodged tax return is more than six months old. Rental income from the proposed investment property is included in serviceability, but lenders haircut that figure by 20 per cent to account for vacancy and maintenance.

Interest only versus principal and interest for investment loans

Interest only repayments reduce your monthly outgoings and preserve cash flow during the holding period. Most lenders offer interest only terms for five years on investment property finance, after which the loan converts to principal and interest unless you refinance or request an extension.

Principal and interest repayments cost more each month but reduce your loan balance and can make refinancing or portfolio expansion simpler down the line. The choice depends on whether you need to maintain liquidity for other expenses or prefer to pay down debt. Neither option changes your ability to claim interest as a deduction, provided the borrowed funds were used to acquire or hold the rental property.

Tax and negative gearing from mid-2027

The Treasury Laws Amendment Act that received Royal Assent in June changes how rental losses are treated from 1 July 2027. Properties purchased after 7:30pm AEST on 12 May 2026 that are not eligible new builds will have rental losses quarantined. You can offset those losses against other rental income or carry them forward, but you cannot offset them against salary or wages.

Properties held before that date retain full negative gearing under existing rules until you sell. If you are releasing equity now to purchase an established dwelling, rental losses incurred after 1 July 2027 will not reduce your taxable employment income. The change does not affect your ability to claim interest, rates, and other holding costs, but it does change how those deductions interact with your other income.

Choosing between variable and fixed interest rates

Variable rates move with the Reserve Bank's cash rate and broader funding costs. They typically offer offset accounts and unlimited additional repayments. Fixed rates lock your repayment for one to five years but limit flexibility and can trigger break costs if you refinance early.

Most property investors in our experience split their loan between variable and fixed. A portion on variable preserves the offset benefit, while a portion on fixed provides certainty during the early years when cash flow is tightest. Lenders price investment loans higher than owner-occupied loans, and the margin varies depending on loan size, deposit, and your overall exposure.

Vacant land and new builds versus established dwellings

The foreign investment ban on established dwellings, extended to June 2029, has shifted some supply back toward local buyers. Temporary residents and foreign nationals can still purchase new builds or off-the-plan units, but the pool of competing buyers for established homes has narrowed.

New residential properties that increase dwelling numbers also retain access to negative gearing under the new legislation and may qualify for depreciation deductions that established properties cannot offer. The trade-off is that newly completed projects near Merrylands, particularly around Parramatta Road or closer to the hospital precinct, often sell at a premium to equivalent established stock. Your return depends on whether that premium is justified by rental yield and capital growth over your intended holding period.

Structuring the loan and managing Lenders Mortgage Insurance

If you keep your total borrowing at or below 80 per cent of the combined property values, you avoid LMI. Going beyond 80 per cent triggers an insurance premium that protects the lender if you default. That premium is not refundable and does not protect you.

Some borrowers accept LMI to move sooner rather than waiting to build additional equity. Others stage their purchases, releasing equity from one property, then building equity in the investment property before acquiring a third. Refinancing after values rise or loan balances fall can also remove LMI on future transactions.

Documentation and timing for Merrylands property owners

Banks require a formal valuation of the property from which you are releasing equity. That valuation can take one to two weeks to arrange and complete. Once the valuation is received, the lender assesses your borrowing capacity and issues conditional approval.

Settlement of the refinance or top-up loan can occur separately from settlement of the investment property, or both can be coordinated if timing suits. Most buyers arrange finance pre-approval before signing a contract, then provide the signed contract to the lender to move to formal approval. Merrylands sits within a well-serviced banking corridor, so valuation and settlement logistics are routine, but preparation still matters.

Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions