Key takeaways
- Your first home is usually the deposit. Most second-property buyers borrow against the equity in their existing home rather than saving a fresh deposit.
- You lose the first-home perks. First-home stamp duty concessions and grants do not apply, so budget for full transfer duty.
- New running costs appear. Land tax, capital gains tax on sale, and landlord costs all come into play once a property is not your main residence.
- Three professionals, not one. A mortgage broker structures the finance, an accountant handles the tax and ownership structure, and a conveyancer reviews the contract and any tenancy.
How do I use the equity in my first home to buy a second property?
Usable equity is roughly 80% of your first home's value minus what you still owe on it. Borrowing above that 80% line usually triggers lenders mortgage insurance.
Equity is the gap between what your home is worth and what you still owe. Lenders will usually let you borrow against it up to about 80% of the property's value. On an $800,000 home with a $400,000 loan, 80% is $640,000, and after your existing $400,000 loan that leaves roughly $240,000 of usable equity for a deposit and costs. [illustrative figures only, not a quoted rate] Using equity saves you saving a second deposit, but it increases your total debt, so a mortgage broker or financial adviser should check your borrowing capacity first.
What is cross-collateralisation, and should I avoid it?
Cross-collateralisation is when a lender ties both properties together as security for your loans. A standalone equity release keeps the two properties, and their loans, separate.
When you release equity you can do it two ways. Cross-collateralising links your first home and the new property under one security arrangement, which can be simple to set up but harder to unwind, because selling or refinancing one property can drag in the other. A standalone cash-out loan against your first home keeps the structures separate, so each property stands on its own. There are trade-offs either way and the right choice depends on your plans, so this is a conversation to have with your broker before you sign anything.
Do I still get first-home grants or stamp duty concessions?
No. First-home buyer grants and stamp duty concessions only apply to eligible first homes, so a second or investment purchase pays full transfer duty.
The first-home buyer grants and stamp duty concessions are one-off benefits for eligible first homes. On a second or investment property they do not apply, and in some states investors can pay more than owner-occupiers. Budget for the full transfer duty and check your figure with your state revenue office.
Do I have to pay land tax on an investment property?
Usually yes. Your main residence is generally exempt, but investment properties attract annual land tax once your total land value in a state crosses its threshold.
Land tax is a yearly state tax that your main residence is generally exempt from. Once you own an investment property its land value counts, and each state adds up (aggregates) the land you own there against a threshold. Cross the threshold and land tax applies each year, at rates and thresholds that differ across New South Wales, Victoria and Queensland, with foreign owners often paying a surcharge on top. It is worth modelling this with your accountant before you buy, because it is an ongoing cost, not a one-off.
What tax can I claim, and what do I pay when I sell?
While it is rented, you can generally claim the running costs against the rental income. When you sell, capital gains tax usually applies, unlike your main residence.
When a property is genuinely rented out or available for rent, you can usually claim its running costs against the rent, including loan interest, property management fees, repairs, insurance and depreciation. If the costs are more than the rent, that loss can often be offset against your other income, which is what negative gearing means. When you sell, capital gains tax usually applies to the profit, though a discount often applies if you have held the property for more than twelve months. Your main residence is generally exempt from capital gains tax. The detail here is genuinely an accountant's job, so get advice for your situation.
Is a holiday home treated the same as an investment property?
Not quite. A holiday home you use yourself is only partly deductible, because the costs can be claimed only for the time it is genuinely rented or available to rent.
A pure investment property is rented out to produce income, so its costs are generally deductible. A holiday home you use yourself is different: you can usually claim costs only for the periods it is genuinely rented or available for rent, not the time you use it privately. If lifestyle is the main reason you are buying, treat it as a lifestyle purchase rather than an income one, and get your accountant to confirm what is deductible.
What if the property already has a tenant?
The lease usually transfers to you as the new owner, so you take on the existing tenant, the rent is adjusted at settlement, and the bond is transferred to you.
Many investment properties are sold with a tenant in place. A fixed-term lease generally carries over to you as the new owner, so review the lease term, the rent and the tenant's history before you commit. At settlement the prepaid rent is adjusted so you are credited for the days after settlement, and the rental bond is transferred to you through the state tenancy authority. If you want the property empty, vacant possession has to be arranged before settlement under your state's notice rules, which take time.
How should I own it: my name, a trust or an SMSF?
How you hold the property affects tax, borrowing and asset protection. Individual ownership is simplest; trusts and self-managed super funds have stricter rules.
Ownership structure matters more on a second property than a first. Buying in your own name, or as joint tenants or tenants in common with a partner, is the simplest route and affects how income and any future gain are split. Buying through a family trust or a self-managed super fund can change the tax and asset-protection picture, but both come with extra rules, costs and lending restrictions, and an SMSF purchase in particular is tightly regulated. This is squarely accountant and financial-adviser territory, so settle the structure with them before you sign, because changing it later can be expensive.
Who do I need on my team?
Three people, each doing a different job. A mortgage broker structures the finance and works out your usable equity and whether to keep the loans separate. An accountant handles the tax, the ownership structure and a depreciation schedule. A conveyancer reviews the contract, checks any lease and body corporate details, and manages settlement and the adjustments. Getting all three involved early is what keeps a second purchase from tripping over a detail late.
General information for residential buyers in VIC, NSW and QLD, not financial, tax or legal advice. Second-property and investment rules change and depend on your circumstances, so confirm your position with a licensed adviser, accountant and conveyancer.
