Refinance to Invest in Australia: Using Home Equity Wisely

Refinance to Invest in Australia: Using Home Equity Wisely

You can refinance to invest in Australia by borrowing more against your home, or by moving your loan to a new lender, and using the released equity as a deposit and costs for an investment property. It works only if three things line up: you have usable equity, a lender’s serviceability test says yes, and you set up the loans so the interest on the investment portion stays tax-deductible. This guide walks through each, with a worked example and the traps that catch first-time investors.

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TL;DR

  • Usable equity is generally what sits between your current loan and 80% of your home’s value. Going above that usually means paying lenders mortgage insurance.
  • Every lender must test you with a serviceability buffer of 3 percentage points above the loan rate. High equity does not guarantee approval.
  • Deductibility depends on what you use the money for, not what secures the loan. Keep investment funds in a separate loan split and keep records.
  • Switching costs and a longer loan term can wipe out the saving from a lower rate, so run the numbers over the full term.
  • If you later move out and rent your home, capital gains tax rules change in ways many owners do not expect.

Table of Contents

What refinancing to invest actually means

There are two moves people lump together under this phrase.

Equity release. You increase your loan, or open a new split, against your home. The extra cash becomes the deposit, stamp duty and buying costs for an investment property. Your home then secures both the home loan and, often, part of the investment purchase.

Rate-driven refinance. You move your existing loan to a lender with a better rate or features. You may then release equity in the same application, or you may simply free up cash flow that helps you save for a deposit.

The first move builds a portfolio faster but adds debt. The second is lower risk but slower. Many investors do both: refinance to a sharper rate, then draw equity once the new lender has revalued the property.

Comparison of two refinance approaches

Step one: work out your usable equity

Equity is your property’s value minus what you owe. Usable equity is smaller. Most lenders cap borrowing at 80% of the property’s value to avoid lenders mortgage insurance (LMI), so the usual formula is:

Usable equity = (property value × 0.80) − current loan balance

Here is an illustration, with made-up numbers:

Item Amount
Estimated home value $900,000
Current loan balance $450,000
80% of value $720,000
Usable equity $270,000

That $270,000 is a ceiling, not a target. A lender’s own valuation may come in below your estimate, and your income has to support the larger debt. If the lender values the home at $850,000, 80% is $680,000 and usable equity drops to $230,000, a $40,000 swing from one number.

Before you apply, get a realistic view of your home’s value. WealthStacker gives you free automated quarterly valuations so you are working from a recent estimate rather than a hopeful one.

Step two: pass the serviceability test

This is where most equity plans stall. APRA requires lenders to assess new lending, refinances included, at an interest rate 3 percentage points above the loan’s rate, and that setting remains in place. Lenders also count your other debts, living costs, dependants and the rent you expect from the new property, usually shaded down.

A quick example of why this bites. With the average advertised owner-occupier variable rate sitting around 6.54% p.a. as at 20 October 2026, a lender may test your repayments at roughly 9.5%. A loan that feels comfortable at 6.5% can fail at 9.5%.

APRA has also told banks it expects exceptions to policy to be managed carefully within each bank’s risk appetite. So you cannot count on a lender bending the rules because you have large equity. Strong-profile borrowers may find more flexibility, but it varies by lender and by month.

Practical ways to improve your position before applying:

  • Pay down credit cards and cancel unused limits. Lenders assess the limit, not the balance.
  • Reduce other debts, such as car loans and buy now, pay later accounts.
  • Apply with a partner’s income if you are buying together.
  • Keep your living expenses honest and consistent with your bank statements.

If you want to see how your numbers might fare before a lender does, our guides on testing the APRA buffer and debt-to-income limits and modelling buffers and tax risk before borrowing home equity go through the mechanics.

Step three: structure the loans for tax

This is the part that costs people real money when they get it wrong.

The ATO looks at the purpose of the borrowing. Interest is deductible when the loan is used for an income-producing purpose, such as buying a rental property, and not for private purposes. If a loan is used for both, you must apportion the interest.

The security is irrelevant to that test. An ATO ruling on this exact situation says that where you redraw from your home loan to put towards an investment property, the interest is deductible because the funds are used to buy the rental. The catch is keeping that link clean.

What that means in practice:

  1. Create a separate split for the investment funds. Draw only what you need for the purchase, and have it paid directly toward the property.
  2. Never mix purposes. If you borrow $200,000 for the deposit and costs and add $20,000 for a new kitchen in your own home, the kitchen portion is private and its interest is not deductible.
  3. Do not park investment money in an account you also use for daily spending. Mixed accounts make apportionment messy and can put the deduction at risk.
  4. Keep records. Loan statements, settlement documents and the contract of sale show where the money went.

Offset and redraw accounts add a wrinkle, because money moving in and out can change the purpose of a loan over time. Our comparison of offset versus redraw and the ATO risks explains how.

A registered tax agent or accountant should sign off your loan structure before you sign contracts. Fixing a tangled structure later is far harder than setting it up properly.

What switching actually costs

A lower rate is attractive, but the saving is not the whole story. Moneysmart notes that variable rates on the market can differ by more than 2%, so checking the market periodically is sensible. It also points out that costs of switching, such as discharge fees, application fees and possibly other charges, can eat into the gain.

Here is a simple way to test it. Suppose a lender offers a rate 0.36 percentage points lower than yours on a $600,000 loan. That is about $2,160 a year in interest (600,000 × 0.0036). If switching costs you $1,500, you break even in under a year. If it costs $4,000, it takes nearly two years. And if the refinance resets a 22-year remaining term back to 30 years, the lower repayment can hide a bigger total interest bill.

Two habits protect you:

  • Keep the same remaining term. Ask the lender to set repayments to your existing end date, or pay the old minimum anyway.
  • Compare total cost, not headline rate. Include fees, any cashback conditions and the revaluation risk.

Where interest rates stand right now

The RBA cash rate is 4.60% p.a. after a 0.25 percentage point rise announced in late September 2026. Rising rates do two things for an investor: they raise your repayments on both loans, and they make the 3 percentage point buffer harder to clear because the tested rate climbs with the loan rate.

With rates moving, model the investment at a higher rate than today’s. If the numbers only work at the current rate, the plan has no margin. Our piece on the role of leverage in building property wealth covers how gearing magnifies both gains and losses.

Risks to weigh before you release equity

Cross-collateralisation

Some lenders will want both properties as security under linked loans. That can limit your options later, because selling or refinancing one property may need the lender’s approval over the other. Ask how each loan will be secured, and read our explainer on cross-collateralisation risks before agreeing.

Two properties linked as loan security

Negative cash flow

If rent does not cover interest, rates, insurance, management fees and maintenance, you fund the gap from your own income. Check you can carry that gap for a year or two with a vacancy or two and a rate rise on top.

Owner-occupier versus investor loans

Investment loans are often priced differently from owner-occupier loans, and the two are assessed differently. If you are unsure which applies to your plan, see our guide to owner-occupier versus investor loans.

Turning your home into the rental

Some people refinance, buy a new home and rent out the old one. That changes your capital gains tax position. The ATO says your main residence exemption is not full if you use the home to produce income, and the exemption must be worked out by reference to the period it was used for income. There is also a market value rule that can apply if a home first earns income after 20 August 1996, which resets the cost base used for the calculation. Speak to a tax adviser before you move out.

Is a broker worth using?

For an equity release with a new purchase, a mortgage broker can compare lenders’ policies on serviceability, rental income shading and equity release, which differ more than rates do. Under ASIC’s best interests duty, brokers must act in your best interests when providing credit assistance and manage conflicts of interest. Ask how they are paid and which lenders are on their panel.

Model it before you commit

The hardest part of refinancing to invest is seeing the whole picture: your new loan sizes, the rent, the costs and what it does to your net worth over the next 15 years. WealthStacker is built for that. You can run buy-versus-rentvest scenarios, check borrowing power estimates and track your net worth without a spreadsheet. Start with the WealthStacker toolkit and test your plan against a higher-rate scenario before you speak to a lender.

If you are earlier in the journey, our rentvesting deposit strategy guide and the broader WealthStacker blog cover other ways to build a deposit without releasing equity.

A checklist before you apply

  1. Get a current estimate of your home’s value and calculate usable equity at 80%.
  2. Reduce credit limits and short-term debts.
  3. Model your repayments at the current rate plus 3 percentage points, and at a rate higher still.
  4. Decide the investment purchase budget, including stamp duty, legal costs and a cash buffer.
  5. Ask a broker or lender how the loan splits and security would be set up.
  6. Have an accountant confirm the structure supports deductible interest.
  7. Compare total switching cost against the saving over the full term.

FAQ

Can I refinance my home loan to get cash out for an investment property?

Yes, if you have usable equity and the lender’s serviceability assessment approves the higher loan. Most lenders cap lending at 80% of value without LMI. The funds should go into a separate split used only for the purchase so the interest stays deductible.

Is the interest on equity I borrow to buy an investment property tax-deductible?

Generally yes, because the ATO looks at what the money is used for rather than what secures the loan. You must apportion interest if the same loan is also used for private purposes. Keep clear records and confirm your structure with a tax professional.

Why can I be declined when I have a lot of equity?

Lenders test your ability to repay at a rate 3 percentage points higher than the loan rate, and they count all your debts and living costs. Equity helps with security but does not replace the income test. Reducing credit limits and other debts often improves the outcome.

Is refinancing always cheaper?

No. Discharge and application fees, and a longer loan term, can outweigh a lower rate. Compare the total cost over the remaining term, not just the monthly repayment.

Sources

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