If you’re wondering if you can buy an investment property, you’re not alone! Investment properties are one of the most popular ways Kiwis choose to invest. We look at the best approach to 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 under the Credit Contracts and Consumer Finance Act 2003 (CCCFA). The Responsible Lending Code has undergone several changes over the years.
The most recent changes to the code modified and defined the rules lenders must follow when calculating a borrower’s ability to afford debt.
The rules were previously conservative and onerous. As a result, banks interpreted the rules conservatively to ensure that they didn’t make decisions that could be deemed outside the regulations and, therefore, incur sanctions. The rigour of checks was eased in 2023, and the latest changes further reduced it.
The code still requires lenders to demonstrate that they’ve worked out whether a borrower can afford a loan. But now, they have the flexibility to use common sense and allow for the countless differences in borrowers’ circumstances.
The updated code acknowledges that, while some expenses cannot be reduced, discretionary costs such as luxuries and holidays can be reduced or eliminated and aren’t true living expenses. Borrowers shouldn’t have to prove their ability to continue affording these items when applying for a home loan, as generally, they reduce discretionary spending when necessary.
The calculations
Lenders apply several calculations to decide whether to approve or decline an application, for an investment property.
This includes:
- Calculating the loan-to-value ratio (LVR). The LVR is the amount loaned compared to the value of that property. This determines how much deposit is required. See the section below, “How much deposit do I need for an investment property?”
- Calculating the debt-to-income ratio (DTI). DTI ratios are calculated by the total debt divided by the total gross income. The DTI ratio for new investor lending is 7. However, some banks can lend up to 20% of their portfolio to borrowers with a DTI ratio over 7.
- 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. Instead, close as many lines of credit as you can.
- Calculating whether the applicant could afford to pay the mortgage if interest rates increased. This is currently calculated at around 7.00% – 7.50% interest per annum. They take into account any existing mortgages 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.
- Banks scale rental income by approximately 65% to 75% to account for periods of tenant vacancies and other costs such as rates and insurance.
Non Bank Lender Options – 10% Deposits for Investments:
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 may charge. If the banks say no, non-bank lenders can be a great option. It all comes down to the individual’s circumstances; we work with both bank and non-bank lenders to match you to the best provider! We currently have access to Non Bank Lenders, who can help with as little as a 10% deposit, for a New Build or Existing (Older) property!
How much deposit do I need for an investment property?
It all depends on the type of lender and the type of property being purchased. In addition, lenders often adjust their policies.
Generally speaking, you’ll need 30% to get a bank loan for an existing property, whereas you often only need 20% to 10%, when using a non-bank lender (this option has additional costs).
New builds are exempt from LVR restrictions, so with the right property and lender, you may get a loan with as low as a 5% deposit, as a First Home Buyer.
Do I need cash for my deposit, or can I use equity?
Either! It’s 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. the value of their current properties) towards their deposit.
How do I use my equity to purchase an investment property?
Your Mortgage Adviser will manage this process for you. Depending on your options, you may need to decide whether to reuse the lender that holds your current mortgage, or 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 appropriate for your situation. This is where Mortgage Advisers 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 / short term” debt. This means laybys, car loans, credit card debts and credit defaults. As mentioned above, when it comes to credit cards and overdrafts, lenders look at the limits, not what is currently owed. Ideally, cancel any lines of credit, or if that’s not possible, get the limits reduced as much as possible.
The challenge is that paying down debt tends to reduce your deposit. This can be a balancing act, and you need advice specific to your circumstances. As always, talk to us for specialized advice!
Maximise your income
If you have any investment properties already and are in a position to review the rents, make sure the rents align 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, may allow you 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 valued. This would dramatically increase the amount of equity you could borrow against.
Look for investment properties that lenders will approve
This means you may want positive cashflow properties, i.e. properties with rental income higher than the mortgage and expense costs.
Look for properties where you can borrow less and 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.
Remember, you’re looking for an investment property, not a home for yourself. This could mean you buy in a location nowhere near where you live, and a property you wouldn’t be interested in for yourself.
Establish healthy spending habits
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 to have proof of changed habits. While this step isn’t essential to get approved for a home loan, it does make your application more attractive to lenders and is a good way to practice living within a reduced budget while growing your savings!
Get expert advice
The best first step is to get in touch with a mortgage adviser. We will assess your current situation and advise you of your options. Contact us and get your property portfolio underway!