If you’ve got equity in your home, you may be able to use it as a deposit to buy an investment property, but what value property can you buy?
That’s where the Rule of 4 comes in.
What is equity?
Equity is the difference between your property’s market value and what you owe against it.
For example:
-
If your home is worth $800,000
-
And your loan is $500,000
-
Then you’ve got $300,000 in equity
But you can’t use it all. The bank will hold some back as a buffer to protect its interest in the property. You might have $300,000 of equity, but how do you work out how much you can use?
You can do that here by using our free equity calculator. Once you know how much usable equity you have, the next step is to work out what value property you can buy with it.
The Rule of 4 — a simple formula that works
At an 80% Loan-to-Value Ratio (LVR), the magic number is 4.
Multiply your usable equity or cash by 4 to work out the maximum value of the property you can afford — we have allowed 5% for stamp duty and buying costs.
If you’ve got $100,000, that means you could buy a property worth up to $400,000.
It’s simple. Practical. Repeatable.
How does it work? Let’s see.
Let’s say you’re buying a property for $400,000:
-
The bank lends you 80% = $320,000
-
You need to cover the $80,000 deposit
-
Plus, you’ll pay around 5% in buying costs = $20,000
That’s:
$80,000 (deposit) + $20,000 (costs) = $100,000
In other words, you need 25% of the total property price to cover the deposit.
And 25% × 4 = 100% — that’s why this rule works.
What if you’re borrowing at a higher LVR?
If your lender is willing to go above 80%, the multiplier increases:
| LVR |
Multiply by |
Property Value (based on $100k) |
| 80% |
× 4 |
$400,000 |
| 85% |
× 5 |
$500,000 |
| 90% |
× 6.66 |
$666,000 |
You can stretch your equity further this way — but keep in mind:
-
Your loan will be bigger, so you will pay more interest
-
You may be hit with Lender’s Mortgage Insurance (LMI)
-
You need strong borrowing power to borrow over 80% of a property’s value.
Q: Should you use all your available equity?
A: Not necessarily.
You don’t want to put yourself in a vulnerable position. Things happen — job changes, illness, rising costs. You want a buffer.
You could keep some cash in savings, or leave a portion of your equity untouched. That way, you’ve got something to fall back on if life throws you a curveball.
Real example: Molly’s approach
Molly had $200,000 in equity. At 80% LVR, that gave her:
$200,000 × 4 = $800,000 in property buying power.
But she chose to leave $50,000 aside for emergencies.
So she worked with $150,000 of usable equity instead:
$150,000 × 4 = $600,000 property value
If she buys off the plan and pays stamp duty only on the land, she may even stretch that further. Spending less on buying costs increases what she can afford.
A word of caution
The Rule of 4 gives you a useful estimate — but it doesn’t guarantee the bank will lend you that amount.
You still need:
- Enough income
- Strong borrowing capacity
- A clean credit record
