First of all: cash or equity?

This may surprise some, but you don’t necessarily need a cash deposit to purchase an investment property. If you already own your own home, and you have enough equity in it, you may be able to borrow against that equity to fund the deposit and purchase costs. We’ll get back to this opportunity shortly.

On the other hand, if you’re a first-home buyer, you can consider ‘rentvesting’: this means buying an investment property and renting that out, while you continue to rent the home you live in. In this case, you’ll need at least a 40 per cent deposit on the rental property.

Using equity from an existing home

In short, equity is the difference between the current value of your house and how much you owe on it. With property prices growing faster than ever, even if you bought your house just a few years ago, you may find that you already have some equity built up.

Here’s a simple calculation for illustration purposes: if your home is now worth $700,000 and your outstanding mortgage is $400,000, you have $300,000 in equity. The faster you repay your mortgage, the more equity you build. And the more your home increases in value, due to market trends and/or improvements, the more equity you build.

So, how much can you borrow? The answer depends on your situation. You can typically borrow up to 80 per cent of your current property value, so using the previous example, up to $560,000 (80 per cent of $700,000), less what you currently owe on your mortgage ($400,000). So, you may be able to borrow $160,000 for a deposit on a second property, assuming you can afford the regular repayments on what would become a mortgage of up to $560,000.

But remember, equity is just one of the factors that your lender will consider. They will also look at your income and the potential rental income of the investment property.

Not quite sure where you stand? Get in touch: we can help you understand if your equity and income levels are sufficient, and what is a good rental yield from a lender’s standpoint.

What about rentvesting?

Depending on your circumstances, buying an investment property as a first-home buyer can make good financial sense. For example, you may buy a house in a more affordable area and rent it out, while renting the home you live in, in your preferred suburb.

Having said that, rising house prices have made saving a deposit particularly challenging, and raising 40 per cent may be out of question for now. Also, ‘rentvestors’ can’t use their KiwiSaver money: you can only withdraw your funds for a home you intend to live in.

Your investment loan options

Depending on your investment strategy, some loan types and repayment options can be more appropriate than others.

Once again, we’re in your corner and can talk you through the different rates, fees, and features available with different loans. And our help doesn’t end there.

Getting a loan pre-approval

Whether you’re buying your first home or the next one, getting a loan pre-approval can make the process a lot easier and faster. A mortgage pre-approval is a lender’s offer to loan you a certain amount under specific conditions, based on your income, assets, liabilities and expenditure.

While it’s not a guarantee, it can help you determine a price range for your investment property. Keep in mind that the pre-approval letter shows the maximum amount you can borrow, but it’s still important to choose a property based on what you can afford.

For example, how much rent will you need to charge to cover loan repayments and other expenses? And what would happen if your rental sat empty for a while? Would you still be able to meet the loan payments?

Other costs to budget for

Before signing on the dotted line, don’t overlook relevant searches like building and pest inspections, and ask a lawyer to check the LIM report and any conditions and inclusions in the sale-and-purchase agreement.

These checks come at a cost, but if you consider the high risk of costly mistakes, it’s money well spent.

And of course, make sure you factor in other costs upfront. While your tenants’ rent may pay the mortgage, and they will be responsible for their utility bills, as a landlord you’ll need to take care of ongoing maintenance, extra repairs, insurance, council rates, and more.

Ready to become a landlord?

Please don’t hesitate to contact us. As mortgage advisers, we’re here to answer any questions you may have around using equity or buying an investment property before the first home.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.

Link Financial Group Ltd trading as Mortgage Link and Insurance Link FSP 696731 holds a licence issued by the Financial Markets Authority to provide financial advice. Please visit https://mortgagelink.co.nz/available-disclosure/ for more information and Disclosure information.