The dos and don'ts of raising finance for an investment property

OPINION: Whether it’s a bach at the beach, house in the suburbs or small apartment in the city, the prospect of owning an investment property has long been part of the Kiwi dream.

According to Statistics New Zealand, residential property now accounts for 32 per cent of all Kiwis’ investments (as at March 2017) – making it the highest share of investment New Zealand has seen in 45 years. This comes despite concerns about primary residential home ownership levels. 

Perhaps it’s the appeal of owning a tangible asset that makes putting our money into property rather than any other investment vehicle so rewarding. A buy-to-let home still presents the opportunity to build an asset base, secure a passive income in retirement and enjoy capital gain on appreciation on property values. But let’s face it, the best return on property can be expected when it is treated as a long-term goal rather a two to five-year investment vehicle.

And as with any other investment it requires research, know-how and expert advice to make it feasible. Here are five important factors to bear in mind.

DO invest time in considering your financing structure

When investing in a second property, the structure of lending is critical to ensure you maximise your interest savings and tax benefits, and minimise the time it will take you to pay off your loan.

How well you plan your loan structure can determine the level of reward you get from your investment. The financing structure will have a huge influence on the bank’s feasibility of your rental property purchase, in particular, looking at impact of loan repayments and how much of those the rental income will cover. In addition, the banks consider rates and insurances as added expenses incurred by the property investment as part of their feasibility study.

I have had some enquiries from clients who have purchased investment property, yet reside in rental property themselves. It is important to explore and consider all the options available to you.

DON’T forget the heftier deposit

If you already occupy a house and are looking to purchase a second property for rental investment purposes, the maximum lending afforded to you against that rental property under current Reserve Bank restriction is 65 per cent of the total house cost. This means that you’ll need to raise at least 35 per cent of the asking price in order to secure a home loan – which is substantially higher than the deposit required for an owner-occupied home loan. In some cases, the banks may consider a higher level of lending when considering a new build property.

I see many clients tapping into a wide range of options to help them acquire their deposit. Early attention to existing lending structure, and maximising loan repayments will assist in a quicker reduction of principle borrowing on the owner occupied property, and coupled with potential increases in property value, this will invariably increase available equity to be considered for increased borrowing for an investment property.

Receiving a financial ‘gift’ from a family member is another way to assist with a deposit; this has other implications for the family, and the banks will require the gift to be non-repayable.

Some may consider the purchase of another home for their own occupation and rent out the existing home. Current Loan to Value Ratio (LVR) restrictions will ultimately determine the availability of finance and loan structure, and any existing lending in place will be factored into these calculations, along with affordability assessment.

DO think about what you can truly afford

The borrowing under an LVR of 65 per cent for an investment property will be assessed for affordability. In order to do this, the lending institution needs to look at a combination of your personal income/s, expenses, existing debt and incorporate the potential rental income your prospective property could yield, verified by either the existing tenancy agreement, or a rental appraisal from an approved rental management organisation. Banks all have their own processes and calculations to apply when assessing affordability, and qualified mortgage advisers will assist in identifying the most suitable outcome for a loan application to a lender.

The current lending climate means non-permanent New Zealand residents and Kiwis working offshore will find it increasingly challenging to secure a home loan. Also, there is a growing preference for banks to give priority to their existing clients.

DO call on the right support 

It’s absolutely vital to seek the expert advice of a non-bank affiliated home loan adviser when looking at mortgage package structures and interest rates. As specialists in the industry, they have a deeper understanding of rules and regulations around property investments and can help navigate finding the best term and home loan structures for your investment property.

Best of all, this service comes at no cost to you.

In addition, an accountant should be consulted when securing a mortgage for an investment property, as they need to ensure that you receive appropriate advice around tax implications, and that lending is structured correctly. Your solicitor should also be consulted and can advise of the implications of the Brightline test, which may have some added impact if a purchase is considered for a short term.

Any property will also need to be acceptable security for a bank’s lending, and pre-purchase due diligence should be thorough, and include the expertise of a building inspection surveyor.

DON’T assume you need to move banks

You’re better off securing a home loan with a new lending institution or bank, right? Not necessarily.

Personally, I prefer keeping clients with their existing bank, as LVR rules applied will be the same at every bank you see. By staying with the same bank, the ability to leverage equity from existing property makes it all so much easier, and cheaper, and as you already have products with this bank, they may be more inclined to go the extra mile to keep you as a client. Ultimately though, it is still important to achieve a good result and particularly secure the right loan structure, and that may not always be with a client’s existing bank.

DON’T rule out commercial properties

Commercial property is another option to explore if you’re looking at investment property. The LVR criteria for commercial property lending can be lower than that of a residential property, but banks look at this on a case-by-case basis. Commercial properties tend to yield a higher return over time and because of generally longer tenancy periods, can offer investors more stability.

But it doesn’t come without risk, and here, too, it’s important to speak to your home loan adviser and accountant to work out what would be the best option for you.

Article by Clive Martin - Get In Touch

Clive Martin is a financial adviser with the Lifetime Group. He has 32 years of experience in the banking industry, and has spent over 20 of those years as a bank manager.