How to Finance Your First Investment Property

This guide covers the key financing strategies for first-time property investors in New Zealand, including how to use existing equity, what banks look for, and how to structure your investment loans for success.

Deposit Requirements for Investment Properties

Investment properties have stricter deposit requirements than owner-occupied homes. Under current Reserve Bank LVR restrictions, most investors need a minimum 30% deposit for existing properties.

This means for a $700,000 investment property, you would typically need:

• Existing property: $210,000 deposit (30%)
• New build: $140,000 deposit (20%)

Learn More: Understanding LVR Rules for Investment Properties

Using Your Home Equity

The most common way to finance an investment property is by using the equity in your existing home. Equity is the difference between what your property is worth and what you owe on it.

Example:

In this example, you could potentially access up to $320,000 in equity to use as a deposit for an investment property. With a 30% deposit requirement, this could fund the purchase of an investment property worth over $1 million.

How to Access Your Equity

There are several ways to access equity from your existing property:

1. Increase Your Existing Mortgage

You can apply to increase your current mortgage with your existing bank. The additional funds are then used as the deposit for your investment property. This is often the simplest approach if you have a good relationship with your bank.

2. Set Up a Revolving Credit Facility

A revolving credit facility against your home equity gives you flexible access to funds when you need them. This can be useful if you are not sure when you will find the right investment property.

3. Cross-Collateralisation

Some banks will use both properties as security for your total lending. While this can make approval easier, it also means both properties are at risk if you default. Many investors prefer to keep securities separate where possible.

What Banks Look At

Getting approved for an investment loan requires meeting the bank's lending criteria. Key factors include:

Serviceability

Banks need to be confident you can afford the mortgage repayments. They will assess your income against your expenses and existing debts. For investment properties, they typically include only a portion of the expected rental income (often 60-80%) in their calculations.

Credit History

A clean credit history is important. Missed payments, defaults, or excessive credit enquiries can affect your approval chances.

Deposit Source

Banks want to understand where your deposit is coming from. Equity from existing property, savings, or gifts are generally acceptable. Banks may scrutinise borrowed deposits more carefully.

Property Type

The type of investment property matters. Banks may have different policies for apartments, rural properties, or properties with unusual characteristics. Some property types may require larger deposits.

Structuring Your Investment Loans

How you structure your loans can have significant implications for tax efficiency, flexibility, and risk management.

Keep Investment Debt Separate

It is generally advisable to keep your investment property lending separate from your home loan. This makes it easier to track interest for tax purposes and gives you more flexibility if you need to sell one property.

Interest-Only vs Principal and Interest

Many investors prefer interest-only loans for investment properties to maximise cash flow and tax deductions. However, interest-only periods are limited (typically 5 years) and you will eventually need to pay principal.

Fixed vs Floating Rates

Consider your strategy when choosing between fixed and floating rates. Fixed rates provide certainty, while floating rates offer flexibility. Many investors use a mix of both.

Alternative Financing Options

Non-Bank Lenders

If you do not meet mainstream bank criteria, non-bank lenders may be an option. They often have more flexible policies but typically charge higher interest rates.

Joint Ventures

Partnering with others can help you get into the property market sooner. This could be with family members, friends, or other investors. Ensure you have proper legal agreements in place.

Vendor Finance

Some sellers offer vendor finance where they effectively lend you part of the purchase price. This is relatively rare but can be useful in certain situations.

Working with a Mortgage Adviser

A mortgage adviser who specialises in investment property can be invaluable. They can help you:

• Assess your borrowing capacity across multiple lenders
• Structure your loans for tax efficiency
• Navigate different bank policies and LVR rules
• Present your application in the best light
• Access lenders you might not consider on your own

Most mortgage advisers are paid by the lender, so their service is typically free to you.