You can buy a second home and rent out the first by releasing equity from your current property to fund the deposit and costs on the new one, then converting the old home to an investment. Lenders will usually let you borrow to 80 percent of the current home's value, and they will count the future rent as income, but they shade that rent by around 20 percent and assess both loans at roughly 3 percentage points above the actual rate. For most upsizers, equity is not the problem. Serviceability is.
That is the whole test in one paragraph. The rest of this guide is the arithmetic, the tax traps and the four levers that decide whether it works for you. Last updated August 2026, with the RBA cash rate held at 4.35 percent on 11 August 2026, its second consecutive hold.
We will use one household throughout. A couple own a four bedroom house in Baulkham Hills that values at $1,850,000 with a loan balance of $520,000. They want a five bedroom house in Kellyville at $2,200,000. The property values are assumptions chosen so the maths is easy to follow, not published medians. Swap in your own numbers.
Step 1: how much equity you can actually release
Total equity is what the house is worth minus what you owe. Usable equity is 80 percent of the valuation minus what you owe. Lenders hold back the other 20 percent as their safety margin, and crossing that line triggers lenders mortgage insurance.
80 percent of the valuation. $1,850,000 x 0.80 = $1,480,000
Less the current loan. $1,480,000 minus $520,000 = $960,000 of usable equity
Now the requirement. A 20 percent deposit on the Kellyville house is $440,000, and the buying costs come to $108,698, of which $102,287 is NSW transfer duty at 2026/27 rates ($52,237 plus $5.50 for every $100 above $1,290,000). Our breakdown of the real cost of upsizing in Sydney itemises every one of those lines.
So you need $548,698 released. Round it to $548,700 and the structure looks like this:
| Before | After | |
|---|---|---|
| Baulkham Hills loan | $520,000 | $1,068,700 |
| Baulkham Hills LVR | 28.1 percent | 57.8 percent |
| Kellyville loan | nil | $1,760,000 |
| Kellyville LVR | n/a | 80.0 percent |
| Total debt | $520,000 | $2,828,700 |
| Total property value | $1,850,000 | $4,050,000 |
| Combined LVR | 28.1 percent | 69.8 percent |
Every LVR sits inside standard lending criteria, and there is $411,302 of usable equity left untouched. On paper the deal works. The full usable equity walkthrough is in our guide to using equity to buy your next home, and our home equity service covers the loan structures behind it.
Step 2: the serviceability test that actually decides it
This is where the plan lives or dies, and almost nobody models it before they go shopping.
The rent gets shaded. Cotality put Sydney's gross house yield at 2.9 percent in its Home Value Index released on 3 August 2026. On a $1,850,000 house that is $53,650 a year, or about $1,032 a week. Lenders do not use that number. Most shade rental income by around 20 percent to allow for vacancy, management fees and maintenance, and some go to 25 or 30 percent depending on the property type. At 20 percent:
$53,650 x 0.80 = $42,920 a year assessed, or $3,577 a month
The lender has just ignored $10,730 a year of real income.
The rate gets buffered. APRA requires lenders to assess repayments at 3 percentage points above the actual rate, and it confirmed in 2026 that the buffer stays at 3 percent. If your real rate is 6.5 percent, the assessment rate is 9.5 percent. On $2,828,700 of total debt, principal and interest over 30 years:
| Actual at 6.5 percent | Assessed at 9.5 percent | |
|---|---|---|
| Monthly repayment on $2,828,700 | $17,879 | $23,786 |
| Less rental income counted | $3,353 net | $3,577 shaded |
| Net monthly housing commitment | $14,526 | $20,209 |
| Annualised | $174,312 | $242,508 |
The lender is testing whether you can cover $242,508 a year of housing before a single dollar of living expenses, school fees, car repayments or credit card limits. It then applies a household expenditure benchmark on top and uses the higher of that and your declared spending.
The DTI cap. From February 2026 APRA limits banks to writing no more than 20 percent of new mortgage lending at a debt to income ratio of six times or higher, measured separately for owner occupier and investor lending. On a simple total debt to gross income measure, $2,828,700 of debt needs household income above $471,450 to sit under six times. Definitions vary between lenders, and the limit is not currently binding across the system, but it is another reason a big two property position gets pushed toward the lenders with room on their quota. Run your own numbers through the borrowing power calculator first.
The honest summary: on these figures, most Hills District households do not pass. That is not a reason to give up on the idea. It is a reason to change the shape of it, which is what the levers section below is for.
What the cash flow actually looks like
Assume the deal gets approved and both loans sit at 6.5 percent, principal and interest, over 30 years. That rate is an illustration only. Pricing in August 2026 varies by lender, LVR, loan size and whether the loan is coded owner occupier or investment, and investment loans generally price higher.
| Keep Baulkham Hills and rent it | Sell Baulkham Hills | |
|---|---|---|
| Total debt | $2,828,700 | $1,033,608 |
| Monthly repayments | $17,879 | $6,533 |
| Gross rent | $4,471 | nil |
| Rental running costs, about 25 percent of rent | $1,118 | nil |
| Net rent | $3,353 | nil |
| Net monthly outlay | $14,526 | $6,533 |
| Property owned | $4,050,000 | $2,200,000 |
The gap is $7,993 a month, or $95,916 a year, to hold both. That is the real question. Not whether the bank will say yes, but whether you can carry roughly $96,000 a year of extra outlay through a six week vacancy, a hot water system and a rate move.
The 25 percent running cost allowance covers property management at around 6 to 8 percent of rent including GST, council rates, water, landlord insurance, repairs and strata where it applies. Some years it is less. The year the roof goes, it is a lot more.
The negative gearing surprise most people get wrong
Here is the part that catches almost everyone. People assume that once the old house is rented, all the interest on the loan secured against it becomes deductible. It does not.
The ATO applies a purpose test. What makes interest deductible is the use the borrowed money was put to, not which property secures the loan. The original $520,000 was borrowed to buy the Baulkham Hills house, which is now producing rent, so that interest is deductible. The $548,700 you released was borrowed to buy the home you live in, which is private, so that interest is not deductible even though the debt sits against the rental.
Run it out over a year at 6.5 percent:
| Item | Amount | Deductible? |
|---|---|---|
| Rent received | $53,650 | Assessable income |
| Interest on the original $520,000 | $33,800 | Yes |
| Running costs, about 25 percent of rent | $13,413 | Yes |
| Net rental position | $6,437 profit | Adds to your taxable income |
| Interest on the $548,700 released | $35,666 | No |
So the "investment property" is positively geared before depreciation and it increases your tax bill, while your single largest interest cost, $35,666 a year, gets no deduction at all. That is the opposite of what most people expect. Our explainer on negative gearing in Australia covers the mechanics in full, including the reforms that limit negative gearing on residential property to new builds from 1 July 2027, with properties held at 7:30pm AEST on 12 May 2026 grandfathered.
Two things can change the picture. Depreciation is one: capital works deductions of 2.5 percent a year of original construction cost apply to residential buildings where construction started after 15 September 1987, which can turn a small profit into a small loss. Loan structure is the other, and it matters enormously. Keep the released funds in a separate split rather than redrawing on the existing loan, because a mixed purpose loan account is an accounting nightmare and every repayment has to be apportioned for the life of the loan. Set it up right on day one. This is general information, not tax advice, so run your structure past your accountant before you draw a dollar.
The CGT six year rule, and the valuation you must get on day one
Your main residence is normally exempt from capital gains tax. Move out and rent it, and the ATO's absence rule lets you keep treating it as your main residence for up to six years, so a sale inside that window can still be fully exempt.
Three things to know before you rely on it.
You can only have one main residence at a time. Electing the Baulkham Hills house for those six years generally means exposing the Kellyville house to CGT for the same period. Which choice is better depends on which property grows more, and you do not have to decide until you sell.
Get a valuation the day the tenant moves in. Where a dwelling that was your main residence first produces income after 20 August 1996, you are taken to have acquired it at its market value on that date for CGT purposes. That resets the cost base and can wipe out decades of growth from any future capital gain. A written valuation on day one costs a few hundred dollars and is one of the highest return pieces of paperwork in property.
The clock resets if you move back in. Return, re-establish it as your main residence, then move out again, and a fresh six year period starts. Go past six years in a single absence and only the period beyond six years is taxable, apportioned over your total ownership period.
None of this is a broker's call. Get it in writing from your accountant before the first tenant signs.
Land tax, the cost nobody budgets for
The moment the old house stops being your principal place of residence and starts earning rent, it becomes taxable land in NSW. Land tax applies once the land value of your taxable holdings passes the general threshold of $1,075,000, charged at $100 plus 1.6 percent of the excess. Thresholds have been frozen since 1 January 2025.
It is land value, not property value, so the house on the block does not count. Assume a land value of $1,150,000 on a decent Baulkham Hills block:
$100 + (($1,150,000 minus $1,075,000) x 0.016) = $100 + $1,200 = $1,300 a year
Deductible against the rental income, but it is real cash out and it grows as land values do. On a larger block, or if you already own other land in NSW, it gets bigger fast.
Four levers that make it work
1. Buy a cheaper second home. This is the biggest lever by a distance. Take the Kellyville purchase down to $1,500,000. Duty falls to $63,787 and total buying costs to $70,198, so the release needed drops to $370,200. Baulkham Hills lands at $890,200, an LVR of 48.1 percent, the new loan is $1,200,000 and total debt is $2,090,200. The assessed repayment falls to $17,575 a month, and after shaded rent the net assessed commitment is $13,998 rather than $20,209. Same strategy, a completely different application.
2. Interest only on the investment split, with eyes open. Moving the deductible portion to interest only cuts your actual monthly outlay. It does not do much for serviceability, because lenders assess an interest only loan on the shorter remaining principal and interest term, which can make the assessed repayment higher rather than lower. Useful for cash flow, not a fix for approval.
3. Shop the policy, not the rate. Rent shading, household expenditure benchmarks, how existing debts are assessed and how much room a lender has under its DTI quota vary widely. Two lenders can differ by hundreds of thousands on the same file. This is most of what a broker is actually for.
4. Release less and contribute more. Every dollar of your own cash in the deposit is a dollar less assessed at 9.5 percent. Contributing $100,000 of savings cuts the assessed monthly commitment by roughly $840.
If none of the four gets you there, selling is not a failure. It leaves you at a 47 percent LVR on the new home with room to buy an investment later, and our investment loan service is there when you are ready. If your real goal is to own an investment rather than to keep this particular house, rentvesting in Sydney is worth a read, and if you already hold an investment loan, so is refinancing an investment property loan.
What to do first
- Get a rental appraisal on your current home from two local property managers. Not a yield estimate, an actual weekly figure.
- Ask a broker to run serviceability at the buffered rate with the rent shaded, before you look at a single listing.
- Order an upfront valuation with a lender likely to fund the structure.
- Talk to your accountant about the six year rule election and the split structure, and book the day one valuation.
- Confirm your insurance changes from home and contents to landlord cover the day the tenant moves in.
- Ask for standalone securities in writing at application.
If you want someone to run this on your actual property and income, book a free strategy call or get in touch. We are based in Norwest and we do this every week for Castle Hill and Hills District families.
Ready to work out whether you can keep both?
The equity calculation takes ten minutes. The serviceability test is the one that matters, and it is the one nobody runs until they have already fallen in love with a house.
We will model both scenarios on your actual income and property, tell you which lenders shade rent least and have room under their DTI quota, structure the splits so your accountant does not have to untangle them later, and give you a straight answer on whether keeping the first home is affordable or just appealing.
Call 1300 11 7976 or book a free strategy call. We compare 50+ lenders and there is no cost for the conversation.
Quick answers
Frequently asked questions
Yes, and it is a common upsizing structure. You release equity against your current home to fund the deposit and buying costs on the new one, take a separate loan on the new property, and the old home becomes an investment. The two constraints are equity, which needs the release to keep your current home under 80 percent LVR, and serviceability, which needs your income plus shaded rent to cover both loans assessed at about 3 percentage points above the actual rate. Equity is rarely the blocker. Income usually is.
Yes. Your loan contract almost certainly requires it, and the property use affects both the loan's purpose coding and its pricing. If you do not tell them and they find out, you are in breach. Practically, the loan secured against the property you rent out is usually repriced to investment rates, which are typically higher than owner occupier rates. Lenders differ on how they treat a split that was drawn for owner occupier purposes but sits against an investment security, so ask before you commit.
Enough to cover a 20 percent deposit plus buying costs on the new place without pushing your current home past 80 percent LVR. On a $2,200,000 Sydney purchase that is $440,000 of deposit and about $109,000 of costs, so roughly $549,000 of usable equity. Working backwards, a home worth $1,850,000 would need its loan balance under about $931,000 to clear that bar. You can go past 80 percent, but you pay lenders mortgage insurance for the privilege.
They take the rental appraisal or the lease, then shade it. Most lenders reduce rental income by around 20 percent to allow for vacancy, management fees and maintenance, and some apply 25 or 30 percent depending on the property type or location. On $53,650 of gross rent, a 20 percent shade means only $42,920 counts. They then assess the repayments on both loans at roughly 3 percentage points above the actual rate, in line with APRA's serviceability buffer.
If you move out of your main residence and rent it out, the ATO lets you keep treating it as your main residence for capital gains tax purposes for up to six years. Sell within that window and the gain can be fully exempt. The catch is that you can only nominate one main residence at a time, so electing the old home generally exposes the new one for the same period. Move back in and re-establish it, and a fresh six year period begins. Confirm the election with your accountant.
Usually not. The ATO looks at what the borrowed money was used for, not which property secures the loan. Equity released to buy a home you live in is a private purpose, so that interest is not deductible even though the debt sits against a rental property. Only the portion of the debt that was originally borrowed to acquire or improve the income producing property is deductible. Keep the release in its own split rather than redrawing on the existing loan, or you create a mixed purpose account that has to be apportioned for the life of the loan.
In NSW, yes, once the land value of your taxable holdings passes the general threshold of $1,075,000. The rate is $100 plus 1.6 percent of the excess, and the thresholds have been frozen since 1 January 2025. Your new principal place of residence is exempt, but the property you rent out is not. It is assessed on land value rather than property value, so a large block matters more than a large house. Land tax is deductible against the rental income.
On the new home, yes, because you live in it. The loan secured against the property you rent out is normally repriced to investment rates. The grey area is the split you released to fund your own home, which was drawn for owner occupier purposes but sits against an investment security. Some lenders will price it as owner occupier, others will not. It can be worth several thousand dollars a year, so have your broker confirm the policy in writing before you settle on a lender.
It comes down to cash flow, not to whether the house is a good one. On the worked example, keeping both costs about $14,526 a month net against $6,533 if you sell, a gap near $96,000 a year. If your income absorbs that and you can carry a vacancy, you end up with $4,050,000 of property working for you. If it is tight, selling leaves you at a 47 percent LVR on the new home, and you can buy an investment later when the numbers are calmer.
You have to notify the lender, and in most cases the loan gets recoded to investment purpose and repriced. You do not necessarily have to refinance, though this is a sensible moment to check whether your current lender is still competitive, because investment pricing varies more between lenders than owner occupier pricing does. It is also the moment to split the loan properly for tax purposes, which is far easier to do now than to unpick in three years.
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