How much equity do I need to buy another investment property?

Typically, you need enough equity to cover a 35% to 40% deposit on the new property, plus purchase costs. For a $600,000 investment property, you would need approximately $210,000 to $240,000 in usable equity.

Can I use equity from an investment property or only my home?

You can use equity from any property you own. However, investment properties have stricter LVR limits (typically 65% to 70%) compared to owner-occupied homes (80%), so there may be less usable equity available.

Do I pay interest on equity I have not used yet?

This depends on how you structure the facility. A revolving credit or offset arrangement means you only pay interest on what you have actually drawn. A loan top-up may charge interest on the full amount from day one.

What if property values drop after I have used my equity?

If values drop, your LVR increases. The bank cannot normally demand repayment as long as you keep up with your payments, but you may find it harder to refinance or access additional equity until values recover.

Using Equity to Buy Your Next Investment Property NZ

Using equity to grow your property portfolio is one of the most powerful strategies available to investors. It allows you to purchase additional properties without saving new deposits from scratch. However, it requires careful planning and an understanding of the risks involved.

Many successful property investors have built their portfolios by repeatedly leveraging equity from existing properties. Each time property values increase or loans are paid down, new equity is created that can be used to fund further purchases.

Understanding Property Equity

Equity is simply the value of your ownership stake in a property. It is calculated as the current market value minus any debt secured against the property.

Equity Calculation Example:

Property value: $900,000
Mortgage balance: $400,000
Total equity: $500,000

However, not all equity is usable. Banks apply LVR limits that determine how much you can borrow against a property, which limits how much equity you can actually access.

Usable vs Total Equity

There is an important distinction between your total equity and your usable equity. Usable equity is the amount you can actually access while staying within LVR limits.

Usable Equity Calculation:

For your home (80% LVR):

Property value: $900,000
Maximum debt at 80%: $720,000
Current mortgage: $400,000
Usable equity: $320,000

For investment property (65% LVR):

Property value: $700,000
Maximum debt at 65%: $455,000
Current mortgage: $350,000
Usable equity: $105,000

Note that investment property LVR limits are typically stricter (65% to 70% in most cases) compared to owner-occupied properties (80% or higher for first home buyers with some banks).

How to Access Your Equity

There are several ways to access equity from your properties:

Top-Up Your Existing Loan

The simplest approach is to increase your existing mortgage. The additional funds go into your account and can be used for the deposit on your next property. This is quick but may not be the most flexible option.

Revolving Credit Facility

A revolving credit facility works like a large overdraft secured against your property. You only pay interest on what you use, and funds can be drawn and repaid as needed. This is ideal if you want access to equity but do not need it immediately.

Offset Account

With an offset account, your savings reduce the interest charged on your loan. You could draw down equity into an offset account, where it reduces your interest costs until you need it for a purchase. This combines flexibility with cost efficiency.

Separate Line of Credit

Setting up a separate facility for the equity release keeps your existing loan structure intact and gives you a clear distinction between your primary mortgage and your investment funds.

The Serviceability Hurdle

Having equity available does not automatically mean you can use it. Banks must also be satisfied that you can service the additional debt. They will assess:

Your income from employment, self-employment, or other sources
Existing debt repayments across all your loans
Expected rental income from the new property
Living expenses and other financial commitments
Stress-tested repayments at higher interest rates

Common Barrier:

Many investors have plenty of equity but cannot access it because their income does not support additional borrowing. This is especially common when existing properties are negatively geared or when income has not grown alongside the portfolio.

Strategies for Using Equity Effectively

Keep Your Home Separate

Consider using equity from your home only to fund a separate facility, which then provides deposits for investment properties. Each investment then stands alone as security for its own loan. This protects your home if something goes wrong with an investment.

Maintain a Buffer

Do not use every dollar of available equity. Keep a cash buffer for emergencies, vacancies, or unexpected repairs. A good rule of thumb is to retain at least three to six months of holding costs as accessible funds.

Consider the Full Picture

When calculating whether a deal works, include the cost of the equity you are using. If you are paying 6.5% on a $100,000 equity drawdown for a deposit, that is $6,500 per year in interest before the investment property itself generates any return.

The Risks of Using Equity

Using equity accelerates your portfolio growth, but it also increases your risk exposure:

Higher debt levels: More debt means more interest and higher required cash flow
Interest rate risk: Rate increases affect your entire portfolio
Market risk: If property values fall, your LVR increases and equity disappears
Reduced flexibility: High debt limits your options if circumstances change
Home at risk: If equity is drawn from your home, it may be at risk if investments fail

When Not to Use Equity

Consider Holding Off If:

☐ You are already stretched on cash flow
☐ Interest rates are rising and you have not stress-tested your position
☐ The property you want to buy does not stack up financially
☐ You do not have emergency reserves
☐ Your job or income is uncertain
☐ You are nearing retirement and need to reduce debt

Getting Started

If you think you have usable equity and want to explore your options, start with these steps:

Get current valuations on your properties (desktop valuations from your bank are often free)
Calculate your usable equity at current LVR limits
Review your income and expenses to understand your serviceability position
Talk to a mortgage broker about structuring your equity access
Consider what type of property you want to purchase and at what price point

The Bottom Line

Using equity is one of the primary engines of property portfolio growth. It allows you to compound your returns by using the bank's money to expand your asset base. However, it requires careful planning, a realistic assessment of risks, and proper structuring to protect your existing properties.

Work with professionals who understand property investment to structure your equity use in a way that supports your goals while managing risk appropriately.