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?
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.
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.
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.