In this scenario you purchase an investment property for other people to rent while you live and rent somewhere else. Many people take up this option if they want to own property but can’t afford to buy where they live and work. In fact, latest research shows that almost 44% of Kiwi first-home buyers consider buying a property to rent out as a viable means for getting onto the property ladder.
What will banks lend for a rental?
If you intend to buy an existing property to rent, banks may lend up to 65% of its value. However if it’s new (meaning you are the first owner within six months of code compliances being issued), banks may lend up to 90% of the property’s value.
Of course, your bank needs to know how much your property is likely to earn in rent. So, before approving your mortgage, you may be asked to get a rental appraisal from a rental property management company. Your bank may consider a percentage of the expected rent as well as other income, like salary, when determining how much you can borrow.
During the application process, your bank may ask you to provide details about how much you spend on your living expenses such as power, water, and groceries. To create a buffer, your bank may use the higher side of what it believes are typical costs for your situation. When calculating what you can afford in mortgage payments, your bank may also use a slightly higher rate than the current interest rate. Doing so provides a level of confidence that if interest rates rise, you will still be able to afford your mortgage.
The extra costs of owning a rental
With homeownership, there are costs that you don’t have when renting—particularly when you become a landlord. So, you need to consider rates, insurance, maintenance—even property management fees. Also, take into account the possibility that your property may have periods without tenants. As a safeguard, you can take out landlord insurance, which may cover you for such things as lost rent as well as damage to the property and contents like furniture. Also, to protect yourself and your family should you become ill or lose your job, your bank may suggest that you get life, income, or trauma insurance.
What happens with KiwiSaver?
Even if the rental property you are planning to buy is your first home, you will not be eligible to withdraw your KiwiSaver contributions for a deposit. You are also not eligible for the government funded HomeStart grant. Remember though, if you are buying a brand-new house, your bank may lend up to 90% of its value.
Getting your finances in order
If you’ve managed to save for a depost, well done. However, your bank may also be keen to know that the rest of your finances are in order. So before applying for a mortgage, if you can, it can pay to clear any credit card, personal loan, or overdraft debt. Also, check your credit rating, and if you have a bill outstanding, pay it.
Structuring your mortgage
You can structure your mortgage as floating, fixed, revolving, or a combination of all three. When it comes to mortgages there isn’t a one size fits all solution, so we recommend that you talk to your mortgage advisor about how they can structure your mortgage to best fit your lifestyle. To lessen the impact of any interest-rate movements, some people will spread their fixed mortgage across two or more terms so that it doesn’t all roll off at the same time.
Some banks, like BNZ, also offer an offset mortgage which can help lower the interest you pay by looking at the combined balances of your accounts and subtracting these from the total owing on your home loan, meaning you only pay interest on the remaining amount. You can even pool accounts with family members to reduce the interest amount even further.
How offsetting works
Check out the video below for more information.
If you’re ready to apply for a home loan all you have to do is get in touch with a mobile mortgage manager who can work you with you to understand your situation fully and design a mortgage that best suits your needs.