Mortgages on investment properties

An investment property mortgage is different from a mortgage for your personal home. Banks view this type of lending as higher risk – therefore they attach different terms and requirements.

Investment properties can be residential or commercial – our mortgage brokers in our Richmond and Motueka offices can help with both, regardless of whether the property is in Nelson Tasman or further afield.

Keep in mind that investment properties can include a holiday home or bach.

The bank will still want to know about your personal income and expenses. The higher your income, the greater your ability to withstand changes - e.g. not having tenants for a period or a significant increase in interest rates.

They will also factor in the potential rental income from the new property. However, be aware that the banks will always downgrade the expected rent.

Getting conditional approval will give you an understanding of how much you can borrow – and therefore the value of the investment property you can purchase. Having conditional approval means you can move quickly and make an offer and therefore speed up the process for a full approval as you’ve already completed most of the bank’s requirements. 

Some additional info might be required for a full approval such as a property valuation or rental appraisal.

Investment loans vary depending on your circumstances and what you’re trying to achieve. Your loan could be structured in the same way as a personal home loan, or be more complex to take advantage of tax, repayments and leverage. Having your finance structured incorrectly could adversely effect your return on investment significantly by thousands of dollars over the long term.

Owning an investment property has tax implications. Income generated from rent is taxable, which means you'll need to complete a tax return each year. Tax rules often change and can be complex, so it's essential to get regular guidance on your personal circumstances from an independent tax adviser or accountant..

Many investors take advantage of interest only mortgages to reduce outgoings. However, most banks limit interest only mortgages to 5 or 10 years. Interest rates on investment property can be different than for a home loan.

Achieving the right loan structure is the most important part – that may or may not be with your existing bank. We’ll discuss this with you so you’re in the best position to make a decision about your situation.

There are two types of returns: the return from renting or leasing the property and the long term increase in value (also called capital gain). Short term, there is often little or no return after expenses such as insurance, rates, mortgage repayments and maintenance. Generally people buy property to achieve capital gains over the long term.

Don’t forget to factor in your time when assessing a property investment. Looking for suitable properties, finding and managing tenants and organising maintenance.

Property is an illiquid asset – meaning it’s not easy to withdraw or sell your investment quickly. To get any money out, you may need to sell the whole property or increase the mortgage. This can be difficult and comes with additional costs. If you need to sell for whatever reason at a time when the property has decreased in value, you might be left still owing money to the bank.

If you have your home mortgage and investment property with the same bank, there is a risk that the bank could sell one or both properties if you are unable to make repayments.