Home equity may help fund a renovation or contribute towards buying an investment property, but available equity is only one part of the lending decision.
Before increasing your mortgage, compare the purpose, repayment strategy, risks and long-term cost of each option.
For a substantial renovation, extension or structural project, CBM Mortgages can help you assess whether construction finance, refinancing or another lending structure may suit the proposed work.
Renovating may suit homeowners who want to improve their current property and plan to remain there. Buying an investment property may suit borrowers seeking an income-producing asset who can manage higher debt and property risk. Neither option is automatically better, and leaving the existing mortgage unchanged can also be the right decision.
What Is Home Equity?
Home equity is the difference between the lender’s current valuation of a property and the amount owed against it.
Property value
The lender uses its valuation of the property, which may differ from an owner’s estimate or an online property report.
Loan balance
This includes the amount currently owed against the property, including relevant loan splits secured by the home.
Total equity
Total equity is the property value minus the secured debt. It is not necessarily the amount available to borrow.
For example, if a lender values a home at $1,000,000 and the mortgage balance is $500,000, the homeowner has $500,000 in total equity.
The lender must still assess income, household expenses, existing debts, credit limits, repayments, loan purpose and current credit policy.
How Much Usable Equity Could Be Available?
Usable equity is the portion of total equity that a lender may be prepared to let a borrower access, subject to valuation, serviceability and approval.
Worked usable-equity calculation
$1,000,000
$800,000
$500,000
$300,000
Calculation: $800,000 minus $500,000 = $300,000.
The lender must still approve the borrower, loan purpose, valuation and repayments. The lender may also value the property below the owner’s estimate.
Borrowing above an 80% loan-to-value ratio may be possible in some situations, but lender’s mortgage insurance, additional fees or stricter lending requirements may apply.
How Can You Access Home Equity?
Loan increase
The existing lender may allow an increase to the current home loan, subject to a new application, valuation and serviceability assessment.
Separate loan split
A separate split can make it easier to track the new debt and use a repayment strategy suited to the renovation or investment purpose.
Refinancing
Refinancing may allow access to approved equity while changing lender, features or loan structure.
Home-Loan Increase or Top-Up
A top-up can avoid moving the entire mortgage, but the lender may still require updated financial information, a property valuation and evidence of the intended use of funds.
Separate Loan Split
A separate loan split may help:
- Track the renovation or investment debt
- Set a shorter or more focused repayment strategy
- Keep clearer records for an income-producing purpose
- Avoid mixing private and investment transactions in one loan account
Tax treatment depends on how the borrowed funds are used, not simply which property secures the debt. Obtain advice from a registered tax adviser before relying on any interest deduction.
Refinancing
Refinancing should be assessed using the complete cost rather than the advertised rate alone.
Potential advantages
- Access approved equity
- Change lenders
- Restructure loan splits
- Review features and repayment terms
Costs to check
- Application and valuation fees
- Discharge costs
- Fixed-rate break costs
- Lender’s mortgage insurance
- Annual package fees
For more information, see the CBM Mortgages refinancing service.
Option One: Use Home Equity to Renovate
Improve the home you already own
Using equity for renovations may suit a household that plans to remain in the property and wants to improve space, comfort, condition or functionality.
Match the loan to the project
Smaller work may use savings, redraw or a loan split. Major structural work may require construction finance with staged progress payments.
Renovation projects may include:
Improve
- Kitchen or bathroom
- Repairs and maintenance
- Accessibility improvements
Expand
- An extension
- Additional bedrooms
- More living space
Upgrade
- Energy efficiency
- Outdoor living
- Landscaping
Potential Benefits of Renovating
- Improve how the home functions
- Create additional living space
- Address repairs or maintenance
- Improve comfort or energy performance
- Reduce the need to sell and move
- Increase appeal to some future buyers
The result depends on the suburb, existing property, project quality, total cost, buyer preferences and whether the work is properly approved and documented.
Renovation Risks
Project risks
- Cost overruns
- Unexpected structural issues
- Delays and variations
- Temporary accommodation
Finance risks
- Higher mortgage repayments
- Long-term interest costs
- Valuation shortfalls
- Insufficient contingency
If energy efficiency forms part of the project, read our guide to eco-friendly home renovations, including solar, insulation, glazing, running-cost considerations and finance options.
NSW Renovation Approvals
Depending on the property and work, a renovation may be exempt development, complying development, work requiring council consent, or work requiring certification.
Before starting, check with the relevant council or registered certifier and review the NSW Government building and renovation approval guidance.
Option Two: Use Home Equity to Buy an Investment Property
Acquire an income-producing asset
Home equity may contribute towards the deposit and purchase costs for an investment property, subject to a complete lending assessment.
The family home supports additional debt
Problems with the investment, rental income or property value can affect household cash flow and the wider financial position.
What the Lender May Assess
- The value of the current home
- The existing mortgage and proposed equity release
- The proposed investment property
- Expected rental income
- Existing debts and credit limits
- Household expenses
- Interest-rate assessment buffers
- Total debt after the purchase
The lender may not accept all expected rental income when assessing borrowing capacity.
Potential Benefits
- Rental income
- Exposure to potential long-term capital growth
- A tangible investment asset
- The ability to use property equity within a broader investment strategy
Investment Property Costs and Risks
Ownership costs
- Management fees
- Maintenance
- Insurance
- Council and strata costs
Market risks
- Vacancy periods
- Property-value changes
- Rental-income changes
- Interest-rate increases
Tax and purchase costs
- Stamp duty
- Land tax where applicable
- Capital gains tax implications
- Legal and acquisition costs
For further reading, see our guide discussing whether it may be a suitable time to buy an investment property. Check current market information before relying on time-sensitive commentary.
What About Shares or Superannuation?
Borrowing to invest in shares
Borrowing against a home to invest in shares increases both potential returns and potential losses. The investment may fall while the debt remains fully repayable.
- Consider market volatility
- Plan for rate increases
- Keep investment and private debt separate
- Obtain licensed financial and tax advice
Borrowing to contribute to super
Superannuation strategies involve contribution caps, tax rules and restricted access to funds, while the mortgage remains repayable.
- Check contribution limits
- Consider liquidity
- Understand repayment obligations
- Obtain licensed financial and tax advice
Using a home as security increases risk. Obtain appropriately licensed financial, legal and tax advice before using borrowed funds for investments or superannuation.
Renovate or Invest: Which Option May Suit?
Renovate
May suit where:
- The current home no longer meets household needs
- The project solves a practical problem
- The household plans to remain
- The cost and approvals are understood
Invest
May suit where:
- The goal is an income-producing asset
- The household can manage higher debt
- Purchase and ongoing costs are budgeted
- Vacancy and market risks are acceptable
Wait
May suit where:
- Repayments would be uncomfortable
- The emergency buffer would be depleted
- The purpose is unclear
- The strategy relies on optimistic assumptions
The right comparison is not simply “Which option could make more money?” Compare the household benefit, cash flow, total debt, repayment period, risk and what happens if the assumptions do not work out.
Worked Examples
Assume:
- Property valuation: $1,000,000
- Existing mortgage: $500,000
- Renovation borrowing requested: $150,000
- Total lending after approval: $650,000
- Resulting loan-to-value ratio: 65%
The lender must still approve the borrower’s capacity to repay $650,000, the renovation purpose, the proposed structure and any required plans, quotations or contracts.
Leaving the $150,000 renovation debt in a long mortgage term can materially increase total interest. A separate split and shorter repayment strategy may be worth considering.
Assume the homeowner requests a separate $120,000 equity loan for an investment-property deposit and purchase costs.
The current home would secure:
- The existing $500,000 home loan
- The separate $120,000 equity split
The total debt secured against the existing home would be $620,000. Based on a $1,000,000 lender-assessed value, this would represent a 62% loan-to-value ratio.
The investment property would generally have its own investment loan. The lender would assess the complete debt position, rental income and the household’s ability to meet repayments during vacancies, repairs or interest-rate increases.
A separate equity split can simplify record-keeping, but registered tax advice remains essential.
Questions to Ask Before Unlocking Equity
Use this checklist before applying
- What is the lender’s current property valuation?
- How much total and usable equity is available?
- Can the household afford the increased repayments?
- What happens if interest rates rise?
- What is the exact purpose of the borrowed funds?
- Should the new debt use a separate loan split?
- What fees, break costs or refinancing expenses apply?
- Could lender’s mortgage insurance apply?
- How quickly will the additional debt be repaid?
- What will the total interest cost be?
- What emergency funds will remain?
- What independent legal, financial or tax advice is needed?
Review the Strategy Before Borrowing
Home equity can be useful, but it is not free money. Accessing equity increases the debt secured against the home and can increase repayments and total interest costs.
Before proceeding, compare the renovation or investment outcome against the cost and risk of the additional loan.
CBM Mortgages can help assess available equity, compare lending structures and explain the valuation and application requirements of different lenders.
Frequently Asked Questions
What is usable home equity?
Can I use home equity to renovate?
Can I use home equity as an investment-property deposit?
Do I need to refinance to access equity?
Is interest on equity borrowing tax deductible?
Considering using your home equity?
CBM Mortgages can help you assess available equity and compare lending structures for an eligible renovation or investment-property strategy.
