Take your next step onto the property ladder
The investment property space is very complex and there have been even more changes recently. On this page we give you the information you need to understand the market. Contact us for more.
Most lenders require borrowers to meet the minimum Loan-to-Value Ratio (LVR) which outlines how much equity you need to provide and how much they are willing to lend based on the price of the property. For an investment property the LVR is 60% and an owner-occupied property is 20%.
What this means is in order to purchase an investment property, you are required to produce 40% of the purchase price as your own equity.
The 40% equity required can come from a deposit but often equity in your existing owner-occupied property can be released to form this, as long as there is still 20% equity remaining in the owner-occupied property.
Recently, the government has provided lenders with incentive to support construction projects for both home owners investors and investors. It is now possible to secure a 'back my build' loan through ASB, which allows for a 10% deposit and a rate of 1.79% for 3 years. Work with one of our specialists to form an application or learn more about the 'Back my build' loan.
An investment property operating as a rental will receive an income in the form of rent. Lenders consider this as an income used to service the debt but only a portion of it, usually 75%. As part of the application for finance they also require a rental assessment or a tenancy agreement to confirm the rental figure.
If a loan on a property is paid solely with the rental income then it is deemed 'positively geared'. A 'negatively geared' property is when the rental income received does not cover the loan payments in full and the investment property owner needs to pay the remaining loan payments.
There are a number of tax implications surrounding investment properties and there have been many changes to the tax rules recently which have made many investors questioning their options.
The bright-line test has been introduced which states that interest on the loan cannot be used to offset the profit made from the rental income. This means that there will be more income that will face tax charges.
The bright-line test also states that properties purchased on or after the 27th March will 'gains of capital tax' if sold within 10 years. There is more information on the IRD website surrounding the bright-line test before these dates.
For generic information surrounding structure, please visit our home loans page. For investment properties, Interest only loans and Revolving credit options are more viable than for owner-occupied properties.
An interest only loan allows for you to make low repayments and not pay off any principal until you are ready to sell or are receiving rental income and wish to move back to a table loan.
A revolving credit option allows you to offset the total loan through your savings. All income and expenses will flow from this account which will essentially act as an overdraft of the loan.
It is common practice for the loan to be split between your owner occupied property and the new investment property, rather than a blanket loan across the two securities. This makes accounting information easier to be tracked and keep the financials separate.
Talk to a specialist today about a structure that will suite you.