Everything you need to know about investment home loans

There is a high barrier to entry for new property investors. Unlike buying a home to live in where a 20% or 10% deposit will do, you’ll need at least 35% in most cases. Here are a few tips for getting your investment home loan deposit together.

If you’ve owned your home for a while and it’s increased in value, chances are you’ll be able to borrow against it to cover a deposit for an investment property. Generally your bank will allow you to borrow up to 80% of your property’s value - this borrowing can make up all, or part of, your deposit. 

If you can’t get together a 35% deposit and you don’t have enough equity in your home, using a non-bank lender is worth considering. These lenders are not governed by the same strict rules as the banks so they may be more willing to lend to you with as little as a 20% deposit on a new or existing build. These lenders may charge slightly higher interest rates than the major banks for this service. 

Existing builds require a 35% deposit from investors but to buy a new build you’ll generally only need 20%. They also often have lower ongoing costs due to low maintenance and repair bills, and can be great investments. 

Short term residential accommodation can be lucrative if your property is in a good location, well presented and effectively marketed. But it also has a higher risk of vacancies, particularly if your property is in a seasonal holiday location. You’ll need a 35% deposit to buy a property to use as short term accommodation, regardless of whether it’s a new build or existing property. You’ll also need to spend a lot of time managing the property, or pay someone a hefty percentage of your property's income to do it for you. 

Commercial property comes with higher risk, more complexity and high rental yields than most residential properties. If a tenant leaves it’s not uncommon for a property to remain vacant for months or even years so commercial property is best suited to investors with plenty of capital and experience. 

Before you buy an investment property and secure an investment home loan, it’s important to figure out what your investment strategy is going to be. You can then match your mortgage to your strategy. 

Buy and hold is the most popular, lowest risk strategy for property investors. It involves purchasing a property, renting it out, then paying off its mortgage over 10+ years. Properties ideal for this strategy usually have high rental returns, where the income from the property covers most or all of the expenses.

At the time of writing (22/02/2024) a property like this may be very difficult to find due to high interest rates.

Read our 2024 mortgage interest rate forecast.

Buying and flipping is a riskier, higher skill investment strategy. It usually involved purchasing property below market value and either holding it then reselling it soon after when the market rises, or selling it after adding value or renovating. If this is your chosen strategy an interest free mortgage could be a good option, to keep costs low before you sell - as well as a revolving credit if you need extra funds for renovations.

Interest-only mortgages are popular with investors, but they should be used with caution. These mortgages only have interest repayments, meaning you won’t reduce the principal of the original loan at all. 

This may be ideal if you’re planning on buying and selling quickly, or if you need extra cash flow for other investments - but it is risky. If property values go down you may be faced with negative equity (where your loan’s worth more than your property), which can make it hard to refinance. 

Before you buy a rental property it’s important to work out as many of the variables as possible (this is where a good spreadsheet can come in handy). To get started work out:

• How much monthly rental income will the property earn? It’s a good idea to estimate this on the low side and account for vacancies of around three weeks. 

• What will the expenses be? This number should include maintenance, property management fees, mortgage payments, repairs, insurance and more. It’s important to note that interest rates for property investment are generally a bit higher than for owner occupied properties. 

• Will the property appreciate in value? The median value of a home in New Zealand has more than doubled over the last decade, but past performance is no guarantee of future performance. This is a tricky variable to calculate, but you can make some informed estimates based on the level of housing stock vs demand in the area you’re buying, population growth and any infrastructure projects planned in the area. 

Finally, you should work out if the rental income is enough to cover your expenses. If not, can you afford to cover expenses out of your pocket to hold the property, and is it worth holding if it’s costing you money? Having a well thought out, long term strategy can make answering these questions easier. 

Read more about buying an investment property in NZ.

It’s a good idea to start talking to a lender or mortgage broker with investment property experience as soon as you decide to buy an investment property. Don’t default to your bank right away either - consider all your options, including mortgage brokers, banks and non-bank lenders.

• Mortgage brokers can provide access to a number of lenders, helping you choose the best one for your situation. They can also provide free  impartial advice and may have access to better rates than the banks advertise through their industry connections. 

• Bank: going with a bank can be convenient. You may already have your transaction and savings accounts with them and they can also usually offer insurance and investment accounts. Plus if the bank knows you and has your details, the application process may be smoother. However, they can only discuss their products and services - meaning it’s important to consider all your options before you commit to borrowing money from a bank. Banks may also have stricter criteria than other lenders and may be more likely to say no. 

• Non-bank lenders: these lenders are similar to banks in most ways but they may be more open to lending to low deposit, or risky borrowers. They will usually charge higher interest rates.

When choosing a lender, explore several options to find the best deal - and it’s always worth negotiating for a better rate or to waive certain fees. You may be surprised what you’ll get by simply asking. 

Before you start searching for properties it’s a great idea to get pre-approval from your bank or lender. To get this you’ll simply need to:

• Fill out an application form, either online or provided by the lender. 

• Provide proof of income, expenses, employment and your identity. 

  • This may include three months of bank statements, pay slips or employment contracts, verified identification documents etc. 

The lender will then assess your financial situation and accept or decline your application and indicate how much they will lend you. This will help give you certainty around your budget so that you can view investment properties and know that you can afford them. 

Before you make an offer or attend an auction it’s a good idea to get formal approval. Your bank will assess the property you intend to buy then provide an offer with mortgage documents to sign.