Avoid These 4 Mistakes When Using Home Equity

You already own a home, it's grown in value, and now you want to turn that equity into a second property without selling.

The concept is straightforward: you borrow against the equity in your existing home to fund the deposit and costs for a second purchase. But how lenders assess that equity, what they'll lend against it, and how the repayments are structured can determine whether the purchase goes ahead or stalls halfway through.

Mistake 1: Assuming You Can Access All Your Equity

Lenders typically allow you to borrow up to 80% of your home's value without paying lenders mortgage insurance. If your home is worth more than you owe, the difference between what you owe and that 80% threshold is your usable equity.

Consider a scenario where your home is valued at $750,000 and you owe $400,000. At 80% lending, the lender will go to $600,000. That leaves $200,000 in accessible equity, but you'll need to account for refinancing costs and any existing offset or redraw balances that affect how much is genuinely available. Some borrowers overestimate what they can pull out because they calculate equity at 100% of the property's value rather than the lender's serviceability limit. The shortfall often appears late in the process when the valuation comes back or the lender's credit assessment tightens the figure further.

Mistake 2: Not Checking Your Borrowing Capacity Before You Commit

Having equity available doesn't mean a lender will approve the additional borrowing. Your borrowing capacity depends on your income, existing debts, living expenses, and the repayments on both the increased loan against your current home and the new loan for the second property.

In our experience, buyers lock in a contract assuming the equity release will cover the deposit, only to find out their income won't service two mortgages. A buyer earning $120,000 with $400,000 owing on their home and a $30,000 car loan might assume they can borrow another $500,000 to buy an investment property. But once the lender adds the new loan repayments, credit card limits, and living expenses into their assessment, the approved amount might only reach $420,000. That gap between expectation and approval can mean walking away from a contract or scrambling for a co-borrower.

Mistake 3: Choosing the Wrong Loan Structure for the Second Property

When you use equity to fund a deposit, you're taking on two loans: one secured against your existing home and another secured against the new property. How you structure those loans affects your tax position, your flexibility, and your ability to sell or refinance later.

Some buyers roll everything into one loan secured across both properties. That can work if both properties are investments or both are owner-occupied, but it creates problems if one is your home and the other is an investment. Interest on borrowings used to purchase an investment is typically tax-deductible, but only if the loan purpose is clearly separated. Mixing the two means you lose the ability to claim the investment portion accurately, and it complicates any future sale because both properties are cross-secured.

A cleaner approach is to keep the loans separate: increase the loan on your current home to release the equity, then use that as a deposit for a standalone loan on the second property. That way, each loan is tied to a specific property, and if you sell one, the other isn't affected. It also keeps your tax records clean if the second property is an investment.

Mistake 4: Underestimating the Costs Beyond the Deposit

The equity you release needs to cover more than just the deposit. Stamp duty, legal fees, building and pest inspections, and lender costs all sit on top of the deposit amount, and they vary depending on where you buy and what type of property you choose.

For a second home purchase on the Central Coast, particularly around areas like Terrigal or Avoca, stamp duty alone can add tens of thousands to the upfront cost depending on the purchase price and whether the property qualifies for any concessions. If you're buying an investment property rather than a second home to live in, you won't have access to first home buyer concessions, so the full duty applies. Many buyers calculate equity based on a 10% or 20% deposit and forget that settlement costs can add another 3% to 5% on top, which either eats into their usable equity or forces them to borrow more than they planned.

How Lenders Assess Rental Income on the Second Property

If the second property will be an investment, lenders will consider the rental income when assessing your borrowing capacity, but they don't count it dollar for dollar. Most lenders apply a shading rate, which means they only recognise 75% to 80% of the expected rent to account for vacancies, maintenance, and management costs.

As an example, a unit in Gosford that rents for $550 per week will generate around $28,600 annually, but the lender might only count $21,450 in their serviceability assessment. That reduction can narrow the gap between what you need to borrow and what you're approved for, particularly if your income is already stretched across the increased loan on your current home. The rental income helps, but it rarely covers the full cost of the new loan repayments in the lender's calculations, so your personal income still does most of the heavy lifting.

Pre-Approval Locks in Your Position Before You Buy

Getting pre-approval before you start looking gives you a clear borrowing limit and confirms that the equity structure works. It also means you can move quickly when you find the right property, particularly in areas like the Central Coast where stock levels fluctuate and competition can be sharp for well-located homes or units near the water.

Pre-approval typically lasts three to six months and is based on a full assessment of your income, debts, and the equity position in your current home. It's not a guarantee, because the lender will still value the new property and review your circumstances again at settlement, but it removes most of the uncertainty early. If there's a gap between what you want to borrow and what the lender will approve, you'll know before you sign anything, which gives you time to adjust your budget, increase your deposit, or look at a different property type.

Call one of our team or book an appointment at a time that works for you to talk through your equity position, confirm your borrowing capacity, and structure the loans in a way that keeps your options open.