Borrowing for an investment property

Buying a rental property can be a significant step for many New Zealanders and could be a valuable opportunity for long-term financial wellbeing. 

If you’re ready to start investing in property, the first step is to understand how much you need for a deposit. Then, you can decide whether you could use cash or equity to fund the purchase. 

When buying an investment property, you generally need a 30% deposit, which is typically higher than the deposit required for the home you live in. There are some scenarios where this may be more, such as when buying land, or could be less if buying a new build.

The type of property could affect how much you need for a deposit. Knowing what you need upfront will help you be ready when you’re getting your deposit together.

Equity is the difference between what your property is worth and what you owe on it. If your home’s value has increased since you bought it – or you’ve paid down a good chunk of the mortgage – you could have enough equity to use as a deposit.

If you already own a property, you may not need to save up a full cash deposit for your investment property. Instead, you might be able to use some of the equity in your home to help fund the purchase.

1. Find out your home’s current market value.
2. Check your remaining home loan balance.
3. Subtract your loan balance from your home’s value.

For example, if your home is worth $900,000 and your home loan balance is $500,000, you have $400,000 of equity. There are limitations to how much of this equity you can use towards your next deposit, as there are minimum equity requirements (mentioned below).

If you have an ANZ Home Loan, you can calculate your equity by finding your home’s current value and remaining loan balance. You can find both your estimated home value and loan balance in the ANZ goMoney mobile app— under Your home loans. 

If you own more than one property, you might be able to combine equity across them, as long as you meet your bank’s lending criteria. For example, if you have equity of $400,000 in your home and $150,000 equity in a rental, your total equity is $550,000.

You might be able to use cash savings, cash gifts, and/or guarantees to build up your deposit.

Equity can be a useful tool for buying an investment property, but there are risks and rules to keep in mind. 

Lenders generally require you to keep a minimum level of equity in your existing properties – usually at least 20% in your home and 30% in any other investment properties you have. This will impact how much equity you’re able to use for your deposit.

If you're using equity to help fund your deposit for a new investment property, you don't necessarily have to take out your new loan with the bank that holds your existing property. For example, if your existing property is with another bank, you could still use the equity from it to buy an investment property with ANZ. 

If you’re not sure how much equity you have or what your options are, our ANZ Mobile Mortgage Managers are here to help. 

Using equity can give you more financial flexibility, as you may not need to dip into your cash reserves. However, it’s important to understand market conditions and make sure you’re comfortably managing the additional debt if property values drop or rates increase.

While saving a cash deposit can take longer, it leaves your home’s equity intact – which may offer you more security. 

Owning a rental property involves a lot more than covering the repayments. There are also expenses like maintenance, insurance, rates, and tax. When deciding how much you can borrow, lenders typically consider your expected rental income and deduct a proportion of that income to cover these expenses. 

It’s not only the deposit you need to plan for – you also need to think about how you’ll manage your repayments and other costs. Look into average rents in your chosen area and consider these other expenses.

Rental income might not cover everything. Could you top up the repayments on your investment property if the rent isn’t enough? 

Fluctuating interest rates can change how much you’ll need to repay too. Consider whether you can realistically cover the shortfall if interest rates go up.

Could you cover the mortgage if your property is vacant for a stretch, or unexpected repairs are needed? Major renovations or a market downturn might mean you have a period of lower (or even zero) rental income. It could be a good idea to have a plan on how you’d manage these situations.

How much do you expect to spend on maintenance? Keep in mind that different types of properties have different maintenance requirements. For example, a townhouse or apartment may have regular levies you’ll need to pay to the body corporate. Older properties may also need more upkeep or even have a big expense on the horizon, such as a new roof. 

It’s wise to carefully consider these different costs and your ability to cover them. They impact not only how much lenders are willing to lend to you, but what you’re willing to borrow as well. 

Buying an investment property can be an exciting milestone and working out how much you need for your deposit and whether equity could help fund it is a great way to get started. 

It’s worth sitting down with your bank or financial adviser to guide you through the process, so you have a clear understanding of how much you can borrow, before the house hunting begins.