With the recent changes to interest deductibility and the bright-line test, property investment in New Zealand has become an attractive opportunity once again. If you’re an existing homeowner considering buying a rental property or a holiday home, leveraging the equity in your existing home can be an excellent way to jumpstart your property portfolio. Here are five important considerations to help you use your equity to buy an investment property.
1. Work out how much you could borrow
To understand your borrowing capacity, start by evaluating your current financial position using a detailed budget. An effective budget is a powerful tool that helps you track your income and expenses, ensuring you cover all necessary financial commitments without coming up short each month.
Use an online calculator – like this one – to calculate how much your mortgage repayments are likely to be with a higher mortgage. And then work with a Mortgage Express mortgage adviser to get a more accurate picture of your financial situation, get help with mortgage calculations, and a clear understanding of what you can realistically afford.
2. Unlock your existing equity
Equity is the difference between the current value of your home and the amount you still owe on your mortgage. If your home has appreciated in value since you bought it, or you’ve paid down a large part of your mortgage, you could have significant equity available that you could leverage to buy an investment property.
Depending on your financial situation, your lender may agree to let you borrow against your home’s equity and use it as a deposit to buy an additional property. Typically, you could borrow up to 80% of your home’s value, minus the outstanding mortgage amount.
3. Get mortgage pre-approval
Mortgage pre-approval provides peace of mind when you’re searching for an investment property, ensuring you know how much you can afford and how much the bank is prepared to lend to you. Although mortgage pre-approvals are conditional and usually only valid for 3 months, having a pre-approval in place helps you move quickly when you find the right property, and it’s an essential step if you plan to buy at auction.
What’s more, mortgage pre-approval shows sellers that you’re a serious buyer with the financial backing to move ahead with the purchase, putting you in a stronger negotiating position. And because you know up-front how much you can spend, it helps to narrow down your property search.
4. Structure your loan for flexibility
Just like a mortgage for your existing home, structuring a mortgage for an investment property will depend on your personal circumstances and the reasons you’re buying the property. If you’re buying with the intention to on-sell the property in a few years’ time, an interest-only loan could be a suitable option.
Many property investors opt for interest-only loans to maximise cash flow. With these types of loans, the rental income covers the interest charged on the loan, keeping monthly repayments lower, but the principal amount borrowed is not paid until the property is on-sold.
Choosing the right loan structure can significantly impact your investment’s success, so it’s important to find the right split between fixed and variable interest rates and to get financial advice about interest-only loans and whether these are right for you.
5. Understand tax implications
Recent changes to interest deductibility and bright-line test rules in New Zealand have made it essential to understand the tax implications of property investment.
Following the National government’s reinstatement of interest deductibility, property investors can once again claim back a portion of the interest paid on their investment property loan. Starting April 1, 2024, you can claim 80% of your interest expenses, increasing to 100% by April 1, 2025.
Another change is the bright-line test, a method used in New Zealand to tax the profit from buying and selling property in a specified timeframe. As of July 1, 2024, the bright-line test period has been shortened to 2 years, which means if you buy a residential property and sell it within 2 years, you may be required to pay tax on the profit.
Take the next step
Working with a Mortgage Express mortgage adviser can make the process of using your equity to buy an investment property far smoother. They can help you apply for mortgage pre-approval, ensure your loan is structured to your benefit, and explain the nuances of tax implications for property investors. Contact Mortgage Express today to connect with an adviser near you and get started on your property investment journey.
