Guide
Using equity to fund a build without touching your savings.
If you own property with equity, you may not need a cash deposit to build. The equity in your home or investment property can cover the land costs and deposit on a construction loan. Under the 2027 negative gearing rules, building rather than buying established also keeps your full tax treatment intact. This guide covers how the two loans work together and what lenders look at.
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How the equity plus construction structure works
Using equity to fund a build involves two separate loans working in sequence.
- Equity release against your existing property Your existing home or investment property is valued. A lender releases equity up to roughly 80 percent of its value minus what you still owe. Those released funds cover the land deposit, land purchase costs or the upfront contribution required on a house and land package. This loan is secured by your existing property and runs from day one.
- Construction loan against the new property A second loan is arranged against the property being built. It does not draw down as a lump sum. Instead, it releases funds in stages across the build: slab, frame, lockup, fitting out and practical completion. You pay interest only on what has been drawn at each point, not on the full construction loan amount.
- Completion and conversion When the build reaches practical completion, the construction loan converts to a standard principal and interest loan. You now have two loans running: the equity release against your original property and the investment loan against the new build. Both can be with the same lender or different lenders depending on which gives the better structure for your position.
Equity plus construction: key figures
| Usable equity | Roughly 80% of your property's value minus what you owe |
| Equity release | Secured by your existing property; funds land deposit or purchase costs |
| Construction loan | Secured by the new build; draws down in stages across the build |
| Interest during build | Interest only on the equity release plus drawn construction funds |
| After completion | Construction loan converts to principal and interest |
| Cash needed from savings | Often none if equity covers the land and deposit costs |
| Real cap | Serviceability: income plus expected rent must support both loans at completion |
The serviceability calculation that lenders actually run
Equity gets the attention, but serviceability sets the ceiling. A lender assessing an equity release plus construction loan is looking at whether your income, combined with a discounted allowance for expected rent, supports all of the following at once: the equity release running against your existing property, the construction loan interest during the build, and the full principal and interest repayments on both loans after completion.
The assessment uses a buffered rate, typically two to three percent above the actual rate, to stress test repayments. It also accounts for existing debts, living expenses and, where your existing property is an investment, the rental income on it. For buyers with meaningful equity but an income that does not service the full position after completion, the serviceability ceiling arrives before the equity ceiling.
This is a structuring problem, not a dead end. Lenders assess rental income differently, treat existing debts differently and apply different stress buffers. The gap between the most and least generous assessment can decide whether the build is fundable. Our investment property loan guide covers how lenders assess investors in detail.
Why building beats buying established under the 2027 rules
The equity structure is identical whether you use it to buy an established investment property or to fund a new build. The tax outcome differs significantly from 1 July 2027.
For residential properties purchased after 12 May 2026, the negative gearing changes announced in the 2026-27 Federal Budget limit rental loss offsets against wages to new builds only. If you use equity to buy an established investment property, rental losses can no longer be offset against your salary from 1 July 2027. If you use the same equity to fund a new build instead, full negative gearing treatment is maintained. Same finance structure, different after-tax return on the investment. Our guide to the 2027 negative gearing changes covers who is grandfathered, what counts as a new build and what the construction finance implications are.
Keeping the structure clean
Two rules that protect the tax position and your next move:
- Two separate loans, not one. The equity release and the construction loan should each be secured by their own property. Combining them into one loan over both properties, called cross collateralisation, hands the lender more security than needed and tangles every future sale, refinance or top up. Avoid it. Our guide to using equity to buy investment property covers the cross-collateralisation trap in detail.
- Purpose stays clean. The equity release should be kept in a dedicated split used only for the build costs. Drawing equity into an account also used for personal spending contaminates the borrowing and creates a deductibility problem for your accountant. We build the structure so there is something clean to confirm; your accountant confirms the tax treatment for your specific circumstances.
Frequently asked questions
Can I use equity to fund a new build without a cash deposit?
Yes, in many cases. If your existing property has sufficient equity, a lender can release a portion of it to cover the land deposit or purchase costs on a construction project. The construction loan covers the build, drawing down progressively. Your savings stay where they are. The real constraint is serviceability: you need to be able to service the equity release and the construction loan through to completion and after. The equity number gets the attention but the serviceability ceiling often arrives first.
How does equity release combine with a construction loan?
Two loans work together. The equity release is secured against your existing property and provides the upfront funds for land or deposit costs. The construction loan is secured against the new property and draws down in stages as the build progresses. During the build you pay interest only on what has been drawn across both loans. At practical completion the construction loan converts to principal and interest. The two loans can be with the same lender or different lenders depending on which gives the better structure.
Is interest on equity used to fund a build tax deductible?
Deductibility follows the purpose of the borrowing, not which property secures it. Equity released and used to fund an investment build is generally deductible because the purpose is income producing. The key is keeping the equity split clean and not mixing build funds with personal spending, which contaminates the deductibility. We structure it cleanly; your accountant confirms the tax treatment for your circumstances.
How is using equity to build different from using equity to buy established?
The equity release mechanics are identical. The difference is the second loan: buying established means a lump sum at settlement, building means progressive drawdowns across construction stages. Interest during the build is lower than on an equivalent purchase loan because you are only paying on what has been drawn. The build adds timeline complexity but the equity structure and the two-loan separation are the same.
How does using equity to build connect to the 2027 negative gearing changes?
For residential investment properties purchased after 12 May 2026, the announced 2027 rules limit negative gearing against wages to new builds only. Using equity to fund a new build gives you the same equity mechanics as buying established, but the resulting property keeps full negative gearing treatment. Using equity to buy an established investment property loses the wage offset from 1 July 2027. Same structure, different after-tax return. Confirm your specific position with your accountant before committing.
General information only and does not consider your objectives, financial situation or needs. Tax outcomes depend on your circumstances: confirm your position with a registered tax agent or accountant before committing to any property or build strategy. Lending criteria, terms and conditions apply.
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