For many Australians, the fastest way to build a property portfolio isn’t saving another deposit—it’s using the equity already built in their home. In 2026, with rising property values and tighter lending conditions, unlocking equity has become a common strategy among investors.
However, while the approach can accelerate wealth creation, both lenders and the Australian Taxation Office have made it clear that loan structure and purpose are critical—especially when it comes to tax deductibility.
This guide explains how equity release works in Australia, how to do it correctly, and what tax experts and the ATO say you need to get right.
What Is Equity and How Does It Work?
Equity is the difference between your property’s value and what you owe on your mortgage.
For example:
- Property value: $1,000,000
- Loan balance: $600,000
- Equity: $400,000
In Australia, most lenders allow you to borrow up to 80% of your property’s value without paying lenders mortgage insurance (LMI).
Usable Equity Formula
- Usable equity = (Property value × 80%) − existing loan
This usable equity can then be accessed and used as a deposit for an investment property without needing cash savings.
How to Unlock Equity to Buy an Investment Property
Step 1: Revalue Your Property
The process starts with a lender valuation to determine your current equity position. Rising property prices across Australia in recent years have increased equity for many homeowners.
Step 2: Refinance or Take Out a New Loan Split
Most investors access equity by:
- Refinancing their existing home loan
- Creating a separate loan split for the equity portion
Tax experts strongly recommend separating loans by purpose to avoid tax complications later.
Step 3: Use Equity as a Deposit
The released equity is typically used to cover:
- Deposit (usually 20%)
- Stamp duty and purchase costs
You then take out a separate loan for the remaining property value.
Step 4: Pass Serviceability Tests
Even if you have equity, lenders still assess your ability to repay. In 2026, Australian lenders apply strict buffers under guidance from the Australian Prudential Regulation Authority, typically assessing loans at around 3% above actual interest rates.
ATO Rules: Tax Implications of Using Equity
Interest Deductibility Depends on Purpose
According to ATO guidance, what matters is how the borrowed money is usedn not what property secures the loan.
- If equity is used to buy an income-producing investment property → interest is generally tax-deductible
- If used for personal expenses → interest is not deductible
This principle is consistently reinforced in ATO materials and tax advisory guidance.
Avoid Mixing Personal and Investment Debt
A key warning from tax professionals in 2026 is “contaminated loans”.
If you:
- Mix personal and investment borrowings in one loan
- Use redraw incorrectly
- Consolidate debts improperly
You may:
- Lose full tax deductibility
- Be forced to apportion interest
- Create long-term accounting complexity
Refinancing experts stress that structuring loans correctly from day one is critical to preserving tax benefits.
Borrowing Costs and Deductions
The ATO allows investors to claim certain borrowing expenses, including:
- Loan establishment fees
- Valuation fees
- Legal costs
These must generally be claimed over 5 years or the life of the loan.
Why Investors Use Equity Instead of Cash
Faster Portfolio Growth
Using equity allows investors to:
- Enter the market sooner
- Leverage capital growth
- Avoid years of saving
This is one of the most common strategies used by experienced Australian property investors.
Tax Efficiency
When structured correctly:
- Interest on investment loans is deductible
- Losses may offset other income (negative gearing)
Preserving Cash Flow
Instead of using savings, investors can:
- Keep cash buffers
- Maintain liquidity for emergencies or opportunities
Risks of Using Equity
- Incorrect Loan Structuring
Tax experts warn that poor structuring can:
- Eliminate tax deductions
- Create ongoing compliance issues
- Overleveraging
Borrowing against equity increases total debt. If:
- Interest rates rise
- Property values fall
You may face financial pressure.
- ATO Compliance Scrutiny
The ATO continues to monitor:
- Property-related deductions
- Loan structuring strategies
- Incorrect claims tied to investment loans
Recent 2026 alerts show increased scrutiny on property-related arrangements and tax outcomes.
- Using Equity for Personal Spending
Tax specialists highlight a common mistake:
- Using equity for lifestyle purchases (cars, holidays)
This can:
- Remove deductibility
- Reduce long-term wealth creation
Best Practice Strategy for 2026 Investors
To safely unlock equity and invest:
- Split loans clearly by purpose
- Keep detailed records of how funds are used
- Avoid cross-collateralisation where possible
- Work with a mortgage broker and tax adviser
- Align borrowing with a long-term investment strategy
Conclusion: Use Equity Strategically, Not Just Aggressively
Unlocking equity in your home can be a powerful way to build wealth through property but only when done correctly.
In 2026, tighter lending rules and increased ATO scrutiny mean investors must focus on structure, compliance, and long-term planning. The key takeaway is simple: it’s not just about accessing equity it’s about using it in a way that preserves tax benefits and supports sustainable growth.
Done right, equity can help you acquire your next investment property sooner. Done wrong, it can create costly tax and financial consequences.
Sources:
ATO
How can we help?
If you have any questions or would like further information, please feel free to give our office on 08 9221 5522 or via email – info@camdenprofessionals.com.au or arrange a time for a meeting so we can discuss your requirements in more detail.
General Advice Warning
The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this page and on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs.
Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.
Although every effort has been made to verify the accuracy of the information contained on this page and on this website, Camden Professionals, its officers, representatives, employees, and agents disclaim all liability [except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this website or any loss or damage suffered by any person directly or indirectly through relying on this information.
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