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Investment Property
Take your next step onto the property ladder
Investment properties are a great way to grow your wealth and earn passive income. There have been several changes to the wider investment property industry and specifically when obtaining a loan. On this page we give you the information you need to understand the market. Contact us for more.
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Minimum Deposit
Most lenders require borrowers to meet the minimum Loan-to-Value Ratio (LVR) which outlines how much equity or deposit you need to provide and how much they are willing to lend based on the price of the property. For an investment property the standard LVR is 60% and an owner-occupied property is 20%. In other words, in order to purchase an investment property, you are required to produce 40% of the purchase price either through equity or a deposit. If you have existing properties you may be eligible to use the existing equity in your property.
Don't have 40%?
If your bank requires you to provide more equity/deposit than you have available, there are still options out there for you. There are certain banks and non bank lenders which only require as little as a 10% deposit. A quick conversation with one of our specialists and we can let you know your options based on your equity.
Rental Income
An investment property is a great way to earn passive income in the form of rent. If you want to see if a property will make a good investment, try our rental return calculator. With new changes to the way rental return is considered this has effected the ability to obtain lending. As part of the application for finance they also require a rental assessment or a tenancy agreement to confirm the rental figure.
If the loan associated with the investment 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. A
Tax Implications
There are a number of tax implications surrounding investment properties and there have been many changes to the tax rules recently which has 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. In a simple sense this means that more income earned from rental properties is subject tax than before. In line with the government incentivizing building new houses, new build are exempt to this rule.
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. The bright-line test does not apply to your owner occupied property. For more in-depth information surrounding the bright-line test, you can call one of our specialists or visit the IRD website.
Loan Structure
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. update
An interest only loan allows you to reduce the minimum repayments initially by not paying any of the principal loan amount. This is especially useful if the investment property is a new build under construction or if there is a delay in receiving rental income.
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 keeps the financials separate from your personal debt.
Talk to a specialist today about a structure that will suite you.