How to buy that bach you’re currently renting

COMMENT: If you’re lucky enough to be reading this on your Christmas break from a rented holiday bach, you may be considering how you can purchase your own summer hideaway. At first glance, buying a bach seems similar to purchasing an investment property - that is, adding an additional property to your portfolio. From a lending perspective, there are several key differences though.

First, the good news. Typically purchasing an existing (i.e. already constructed) investment property means you need a deposit of at least 40%. In other words, the maximum you can borrow against an existing investment property is 60%, the rest is required out of your cash or equity in your current properties.

But because baches are for your own use, they can fall into the “owner-occupied” category, meaning you may only need a 20% deposit to purchase your holiday home. That’s a significant difference when you’re talking about a bach worth, say, $800,000 ($360,000 of available equity as opposed to $180,000).

Things get a little trickier when it comes to showing you can afford the mortgage on your bach, though. Because this is an owner-occupied property, you don’t get a boost of rental income like you do with investment properties. You need to be able to afford the additional lending solely on your own income. This applies even if you intend to rent out the bach on a short-term rental platform. While it would be nice to hand the banks a forecast of income, the truth is there is no way a bank could accurately measure occupancy rates in every part of the country, particularly now when international tourists are not present.

On a side note, you can use short-term rental income in the future to purchase investment properties or upgrade your home. Most banks will happily use two years’ history of bach rental income because these numbers will clearly show occupancy rates versus how much you are using the property.

If your property is in a well-populated area, a bank could consider using the average income from a long-term tenant in the property. In other words, the worst-case scenario is that if you can’t get anyone in to rent your bach on a short-term basis, you could get a permanent tenant in. An example of this might be an Auckland owner purchasing a bach in Tauranga. If, for some strange reason, no short-term renters were visiting Tauranga, a long-term tenant could easily be found.

There’s a hook here, though. If you choose to rely on income from this "worst-case scenario", your mortgage will be subject to the investment property LVR rules above; in other words, you’ll need a 40% deposit to purchase the bach. You can’t have your pavlova and eat it too.

There’s only one other minor hurdle to purchasing an older bach. Beach towns exploded in popularity around the same time as asbestos became the building product du jour. For these houses, or similar problematic building styles like monolithic cladding, banks may ask for additional reports to make sure the security is in good condition and you aren’t buying a lemon. The report shouldn’t be overly expensive but will give the bank (and you) some comfort on the purchase.

So, if you’re looking down the street of the quiet seaside community and thinking of purchasing your own plot of land, your first step should be to find out how much houses in the area go for (a calming drink may be needed for this) and then to calculate if it’s achievable for you.

- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.