Monthly Archives: January 2022

Mortgage for Investment Property

Can I get a mortgage for an investment property?

Can I buy an investment property?

Many clients have asked me “can I get a mortgage for an investment property”.  So you are not alone. If you’re wondering if you can buy an investment property, read on. Investment , rental or income properties are one of the most popular ways Kiwis choose to invest. We take a look at how to best approach getting a mortgage for an investment property in New Zealand.

What do lenders consider when assessing an application for an investment property mortgage?

The rules

When considering a mortgage application, lenders must follow the Responsible Lending Code rules. In addition, the Credit Contracts and Consumer Finance Act (CCCFA) had changes come into force in late 2021. The result is that lenders now have to seriously take into account applicants’ spending habits.

What’s the impact of CCCFA changes?

Previously, spending habits were only an issue if they were extreme; it was understood that most applicants would reduce their spending (e.g. by eating out less) to accommodate a new mortgage if necessary. Now, applicants need to produce at least three months’ worth of bank statements that show their spending habits don’t eat into what is needed to maintain a new mortgage.

This approach can be frustrating for applicants and may mean action needs to be taken before a successful application is made. It can help to remember that the intention is to ensure that consumers don’t become overextended financially. That being said, at the time of writing (January 2022) the government has indicated they will review CCCFA to make sure it is fit for purpose for property buyers.

The calculations

Lenders apply a number of calculations to decide whether to approve or decline an application for an investment property. This includes:

  • Calculating any current credit cards and overdraft debt by their limits, not actual amounts owed. They don’t take into account how you use these limits. So paying credit card balances off each month won’t improve this calculation.
  • Calculating whether the applicant could afford to pay the mortgage if interest rates increased. This is usually calculated at 6-7% interest per annum. They take into account any existing mortgages as well in this calculation.
  • Calculating the mortgage payments using a shorter period. Some banks require an investment mortgage to be paid off over a shorter period than owner occupied, e.g. over 25 years rather than 30 years. Applicants would need to be able to afford the resulting larger payments.
  • Scaling rental income. Banks scale rental income by approximately 65%-75% to allow for periods of vacancies between tenants and other costs such as rates and insurance.
  • Under new CCCFA rules, current spending habits will be used to calculate whether the applicant can afford to pay the mortgage payments.

Non-bank lenders can be more flexible with their parameters when calculating whether or not to approve an application. This is due to their risk profile and the higher interest rates they charge. In some cases they can be a great option if the banks say no. It all comes down to the circumstances of the individual, we work with both bank and non-bank lenders so can match you to the provider for you.

Mortgage for Investment Property

How much deposit do I need for an investment property?

It depends on the type of lender and the type of property being purchased. In addition, lenders are always adjusting their policies. Generally speaking you’ll need 40% to get a loan from a bank, whereas you often only need 20% when using a non-bank lender (there are additional costs with this option). New builds are exempt from LVR restrictions, so with the right property you can get a loan with 20% or even sometimes as low as 10% deposit.

Do I need cash for my deposit, or can I use equity?

Either! It’s also common to use a mixture of the two. Most people buying an investment property need to use at least some of their equity (i.e value in their current properties) towards their deposit.

How do I use my equity to purchase an investment property?

Your mortgage broker will manage this process for you. Depending on your options, you may need to decide whether you want to reuse the lender that has your current mortgage or to hold a separate mortgage with another lender.

When using equity for an investment it’s key to understand how the LVR limits impact you and which lenders or banks are going to be appropriate for your situation. This is where mortgage brokers get a chance to shine!

How can I improve my chances of getting an investment property mortgage?

Clean up your debt

As much as you can, pay off any “bad” debt. This means laybys, car loans, after pay debts and layby debt. As mentioned above, when it comes to credit cards and overdrafts, lenders look at the limits, not what is currently owed. Ideally cancel any credit cards and overdrafts, or if that’s not possible, get the limits reduced as much as possible.

The challenge of course is that paying down debt tends to eat away at your deposit. It can be a balancing act for which you need advice specific to your circumstances. As always, talk to a mortgage broker.

Establish healthy spending habits

As advised above, lenders now have put a lot more weight on applicants’ spending habits when assessing a mortgage application. Review your spending habits and make a plan to reduce where necessary. Go for at least three months under your new spending regime before applying in order to have proof of changed habits.

Maximise your income

If you have any investment properties already, and you’re in a position to review the rents, make sure the rents are in line with the market.

If you’re employed and feeling brave, ask for a pay rise! A pay rise of just a couple of dollars an hour will give you the ability to borrow tens of thousands more.

Maximise your equity

Review the value of any current properties. They may have gone up in value considerably since they were last evaluated. This would dramatically increase the amount of equity you could borrow against.

Look for investment properties that lenders will approve

This means you want positive cashflow properties; i.e properties where the rental income is higher than the mortgage and expense costs.

Look for properties where you can borrow less and then add value by renovating. This will grow both the capital and the rental income. Or, look at buying a new build, which would give you the benefit of tax exemptions. The changes to the resource management rules is expected to result in a lot more new build opportunities in areas that are in need of more housing.

Remember you’re looking for an investment property, not a home for yourself. This could mean you buy in location nowhere near where you live, and a property that you wouldn’t be interested in for yourself.

As always, the best first step is to get in touch with a mortgage broker. We can assess your current situation and advise you of your options.

Contact us today!

Got Bad Credit And Want Your Mortgage application approved?

This article addresses the question often asked – can I get a mortgage even though my credit history is poor? Credit scores are out of sight and out of mind for most of us. Until, of course, it’s time to get a loan and it becomes an issue. While a bad credit score certainly makes it harder to get a mortgage, it is still possible. So you want success and see how to get a mortgage with bad credit? Then read on.

Can I get a mortgage with bad credit?

In fact, we specialise in exactly this type of tricky mortgage application. Getting a mortgage with bad credit is our speciality.

Content on whether it is possible to get a mortgage with bad credit.

What is a credit score or credit rating?

It’s a score that is calculated by using the public record of your credit history. This record is called the credit report. A credit report contains information such as loans you’ve taken out and any payment defaults against your name.

Sorted.org nicely sums up a default payment as “a payment that has been overdue for more than 30 days, and that the lender has taken steps to recover the outstanding amount.”

A payment default could be something important, such as failing to make a loan repayment. It could also refer to failing to pay a phone bill on time. Both instances would negatively impact your credit score.

A credit score is made up of a number of factors, including:

  • Payment defaults
  • Mortgage arrears
  • Income tax debts or defaults
  • Outstanding or late fine payments,
  • Bankruptcy
  • Court write-offs and
  • Credit inquiries.

The number of loans you have and their amounts can also affect the score. Hire-purchase agreements and car loans, for example, will negatively affect credit scoring.

If you’d like more information on credit records and credit scores, we recommend the sorted.org information page. It details how to can check your credit report and manage any issues.

Why does my credit score matter when applying for a loan?

If you have managed to sort out our current finances and are ready to take on the responsibilities of a mortgage, getting declined due to a past situation will be really frustrating. It can help to remember that mortgages involve large amounts of money, so carry significant risk to the lender and the borrower.

The lender has a legal obligation to ensure they are lending responsibly. This is enforced by the Credit Contracts and Consumer Finance Act (CCCFA).

How can I get a mortgage if I have bad credit?

A bad credit score means a loan from a major bank is unlikely. However there are plenty of other non-bank lenders available. Non-bank lenders specialise in working with people who couldn’t get a loan with a bank.  They can offset the risk of lending to someone with bad credit by charging a slightly higher interest rate than the banks.

The key to successfully getting a home loan when you have bad credit is to use a mortgage specialist, such as Platinum Mortgages. As well as the major banks, we deal with many great non-bank lenders.

We handle most of the paperwork and can pull together an application that gives you the best chance of being approved. So if you’ve had your mortgage application rejected by a bank due to your credit score, don’t worry, we can help. Platinum Mortgages New Zealand Limited specialise in helping you when others can’t.

Once you’ve got your home loan, the goal is to up your credit score within the next couple of years. We can then help you move your mortgage to a bank with lower interest rates. Improve your credit score by paying bills on time, and simplifying debt where possible.

If at the end of the day your finances are holding you back from getting a home loan right now, we can help you get there. We can facilitate the consolidation of your debt to help you manage your debt, clean up your credit report and boost your credit score.

Check out our page on bad debts for more information on your home loan options. Or skip to the next step and contact us to start the conversation on how we can help you in your specific circumstances.

New Zealand Debt-to-Income Ratios

New Zealand Debt-to-Income Ratios

Interest rates are on the increase, and the subject of debt-to-income ratios (DTIs) keeps popping up. So what is this? What does it mean for mortgages in New Zealand. We lay it all out for you in our article below.

What are debt-to-income ratios?

It’s a calculation to decide how much someone can borrow. The limit a person can borrow is decided by a simple calculation using their income.

How is DTI calculated?

DTI is calculated by taking the yearly income of the applicant/s and multiplying it by x to determine the maximum number they can borrow. For instance, if the debt-to-income ratio was set at 6 and the applicant/s earns $150,000 a year then they could borrow up to $900,000.

How are debt-to-income ratios used in New Zealand?

In 2021 the Reserve Bank was given the power to dictate DTI ratios to the banks and other lenders. They haven’t yet acted on this power. They don’t have immediate plans to do so and would go through a consultation process. Use of debt-to-income ratios, according to the government, would be focused at investors rather than homeowners.

While there isn’t yet an obligation to use debt-to-income ratios, some of the major banks have gone ahead and implemented their own DTIs. Other lenders have indicated that they may do the same.

How would debt-to-income ratios be different from current measures?

Currently, the borrowing limit is usually determined using loan-to-value ratios (LVRs). The size of the deposit determines the amount that can be borrowed – to a point. Lenders each have their own complicated affordability calculators. They use this to determine how much money a person could responsibly borrow. Income no doubt plays a main part in this calculation.

So, what does this all mean for borrowers?

In general, the purpose of DTIs is to ensure responsible lending, and to reign in the housing market. While this may limit people’s borrowing options, the aim is that this will keep prices in check. But what it means for you depends entirely on your circumstances.

As a consumer, it’s great to have an understanding of concepts such as debt-to-income ratios. Your mortgage is likely the biggest financial responsibility you’ll ever have so knowing how it works is valuable.

The key however, is to not get bogged down by financial policies and their possible ramifications for your ability to borrow. It’s our job as mortgage brokers to be across the current lending rules and policies. We’re then able to give you advice on how much you can borrow and which lender is best for you. Contact us to find out how we can help you.