COMMENT: With the surprise bipartisan-approved changes to the National Policy Statement on Urban Development (NPS-UD), a good portion of homeowners must now be considering the possibility of adding an additional unit or two to their current property.
The rules allow up to three units of up to three storeys to be built without the requirement for resource consent. Car parking and additional stress on infrastructure aside, this adds a lot of potential for homeowners with larger sections to receive additional rental income. But how does getting a mortgage to build additional units work?
The banks are going to have to make some changes to their policies. Loan to value ratios (LVRs) will almost certainly be their first consideration.
Applicants can currently borrow up to 80% on their own home and 60% on existing investment properties. While building additional units on your current property won’t be an LVR problem (as new builds are allowed to go up to 80%), purchasing a property with three units may prove tricky in the future. So homeowners will have to consider if they are reducing the amount of potential buyers that could bid on their property at sale time.
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Typically banks will allow owner-occupied homes to have a minor additional dwelling and still meet the criteria of “owner-occupied”, but whether this can stretch to an owner-occupied with two additional units remains to be seen. It will likely need some input from the Reserve Bank as to whether this fits within the spirit of the LVR restrictions.
Additionally, under current lending policies, a property with three or more dwellings is referred to, by most banks, as “non-standard” and subject to some LVR restrictions. As these become more and more common (i.e. more standard) under the new higher-density rules, the banks may have to start to consider these as normal properties and relax their restrictions on them.
Of course, when new rental units are built on a property, new income is received. The future rent will be allowed to be included in your mortgagee application and will help with borrowing. Even a simple one-bedroom unit could get $25,000-$30,000 of rental income per year which allows, all other things being equal, for about $200,000-$250,000 of additional mortgage. That won’t be enough to complete most new dwellings but it goes a long way to making it feasible.
To start the process, property owners should get a rough cost-estimate for the project; just to the nearest $30,000-$50,000. Once they know it’s possible to build and the very approximate price, that is the time to approach the bank for pre-approval. It’s always a good idea to ask for a bit more than the estimates as prices tend to blow out as the designs proceed.
The bank will issue that pre-approval with a significant number of conditions - builder’s contracts, consents, valuations etc - but at this stage the property owner will know what they can afford to build and decide whether they are going to go ahead with the project.
Even in this early stage, it is a good idea to sit down with an accountant to go over how to treat the mortgage and build expenses for maximum tax efficiency. Setting these up correctly from the beginning could mean huge tax savings in the future.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
