COMMENT: There has been a lot of talk in the past few months about the loan to value ratios (LVRs), particularly in relation to investment properties. When the Reserve Bank announced its intention to reinstate LVR restrictions, almost every bank upped the deposit requirements for investment purchases to 30% and and then 40%.
That means, in order to get finance approval on a $1m investment property - a surprisingly common price bracket in Auckland, Wellington and Tauranga these days - an investor would need a deposit of $400,000.
It’s a common misconception that investors need that money sitting in their bank account - ie as cash. Home-owners can use the value in their own property to borrow this deposit, essentially meaning they are borrowing 100% of the purchase for the new investment property (40% on their own home or other investment properties and 60% on their new property).
Home-owners can borrow up to 80% of the house they live in. For example, a homeowner in a home worth $1 million and with a mortgage of $400,000 could borrow another $400,000 against their own home (up to 80%) and use that money to buy a $1 million investment property for a total mortgage of $1.4 million ($1 million for the new home and the original $400k they had on their personal property).
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If you are applying to the same bank that has your personal mortgage, this is all done in one application; you are simply asking for the full amount of money for the new property. But if you have decided to apply through a different bank for your investment property this will be done over two applications; the first for $400,000 at your current bank and the second for $600,000 at the second bank.
You can, of course, use a mix of cash and equity. In the example above, if you had $50,000 in cash, you could choose to only borrow $350,000 to purchase a $1 million investment property or add it to the $400,000 borrowing and purchase up to $1.125 million.
When looking to purchase an investment property, I encourage buyers to look at how much deposit they can arrange first (cash plus useable equity in their properties) before finding out whether their income will support the purchase. The deposit is a hard line in the sand and relatively easy to calculate whereas income has a number of factors that affect it - Credit Cards, monthly expense commitments etc. Better to get the easy calculation out the way first!
If you don’t know the value of your house, you can start by using OneRoof’s Valuation page. It can sometimes be good to use a slightly lower number than the one provided to allow for market movements while you apply for your mortgage. For example, if the value shows as $930,000, it is good to use $900,000 to estimate how much you could borrow.
Once you know how much deposit you have to work with, the next task is calculating whether your income is enough to support that new mortgage (remember to include the new rent that will be received).
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
