Top Tips to Refinance and Buy a Second Property

You can use equity in your home to fund the deposit and costs of a second property. This works when the lender's valuation, your income and your existing debts all support the larger total borrowing.

This article is for magistrates who own a home with a loan against it and are weighing up a refinance to release equity. It covers how usable equity is calculated, how to structure the borrowing, and the trade-offs to price in before you commit.

How Do You Calculate Usable Equity in Your Home?

Usable equity is the lender's maximum loan amount against your home, less what you still owe. It is not the same as the gap between your property value and your loan balance.

The lender sets a maximum loan to value ratio (LVR) for the purpose of the loan. It multiplies that ratio by its own valuation, then subtracts your current debt. If the valuation comes in lower than you expected, your available equity shrinks with it. Valuations are the lender's opinion, so it pays to know the figure before you sign a contract on the second property.

A higher LVR can also change the cost of the loan, as some lenders charge more or add fees when you borrow closer to their limit. Ask about this early. You can read more on how this works on our equity release loans page.

Should You Top Up Your Home Loan or Set Up a Separate Loan?

A separate loan, often called a split, is usually the more workable structure when the money is for an investment property. It keeps the borrowed equity apart from your home loan, which makes the records clearer and gives you control over each balance.

A top up to your existing loan mixes the new debt with the old. That is less paperwork, but it blurs the purpose of each part of the debt. Tax treatment depends on your circumstances, so speak with your accountant before you decide how to structure the loan.

The trade-off with a separate loan is that you may carry two accounts, and possibly extra fees, depending on the lender. If you are also looking at restructuring existing investment debt, see our guide to investment loan refinancing.

Worked Example: Releasing $150,000 for a Second Property

As an example, consider a magistrate who owns their home and wants to buy an investment property. After a valuation, the lender confirms $150,000 can be released as a separate loan. It will cover the deposit and purchase costs, and a second loan from the same lender will cover the rest of the purchase.

The illustrative rate in this example is 6.75% p.a. Over 30 years, principal and interest repayments on the $150,000 would be roughly $973 a month. On an interest-only basis at the same rate, the repayment would be about $843.75 a month. The interest-only figure is lower, but the balance does not fall during that period.

The magistrate chooses principal and interest on the equity loan. The $973 a month is the repayment on the equity loan only. The repayments on the second loan for the purchase, and any other costs, need to be added to give the full monthly commitment. The lender will assess serviceability on all the borrowing combined, against the magistrate's assessed income and expenses. The outcome is that the purchase can proceed with a clear structure: one loan against the home for the released equity, and one against the new property. Once the second loan's repayments are calculated, the magistrate can see the full monthly cost before signing.

This is a calculation only. Actual repayments depend on the lender, the loan term and the rate at the time. Use a repayment calculator to test your own numbers.

What Will a Lender Assess When You Refinance for Cash?

A lender will assess your income, living expenses, existing debts and the value of the security. It applies these to the combined borrowing across both properties, not only the new loan.

For a salaried judicial officer, income is generally straightforward to document. Total debt and living expenses are still a key part of the lender's assessment. Our page on borrowing capacity explains how those assessments work in practice.

Before you apply, check your credit card limits. Lenders may count the limit rather than the balance, so closing unused cards can lift your capacity. The trade-off is that you lose that line of credit.

Is Interest-Only Worth Considering for the Equity Loan?

Interest-only can lower your repayments in the short term, but you pay interest on the full balance and the debt does not reduce during that period. When the loan reverts to principal and interest, repayments are calculated over a shorter remaining term, so they will be higher.

If you are considering it for the investment loan, see our page on interest only loans. Compare the repayment after the interest-only period ends, not only the one at the start.

Costs and Risks to Weigh Before You Release Equity

The main risk is that your home secures debt for a different property. If the investment falls in value or sits vacant, your home is still exposed.

Other costs include valuation fees, discharge or establishment fees, and the possibility of break costs if you leave a fixed rate early. Check whether your current lender charges these before you move.

It is also worth checking whether a lower rate is available on your existing loan while you restructure. Our page on getting a lower interest rate outlines the options.

For a structured review of your current loan before you commit, our loan health check is a sensible first step.

A mortgage broker can compare lenders on valuation approach, maximum LVR and fees, so you can see the options side by side. Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions