Investing in property is a popular option for many New Zealanders looking to build their wealth. Where many people become confused, however, is working out what their financing options are for purchasing an investment property. When it comes to building a mortgage empire, there are two common questions that consistently come up.
There is no one-size-fits-all answer to what size deposit you need for an investment property, as there are a number of factors that determine what a bank will be willing to lend you. Your income, the earning potential of the property and your credit history are all going to come into play when the bank makes their decision.
There are, however, also many factors outside your control that will impact the size of your deposit. One such example is loan-to-value ratio (LVR) restrictions put in place by the Reserve Bank. LVR is the ratio between the value of the property and the size of the loan that's been lent on it. For example, a loan of $800,000 on a $1,000,000 property gives an LVR of 80 per cent. The lower the LVR, the more likely the bank will be to approve your loan, but it also requires a larger deposit.
High LVR loan restrictions mean only a small proportion of a Bank's total new lending can be loans of this kind. For investment property mortgages, only 5 per cent of a bank's new loans can be of the high LVR (65 per cent and above) kind. In other words, only 5 per cent of new loans can be given to people who have deposits of 35 per cent or less.
Again, there is no straightforward answer to this. The total amount you're able to borrow is going to depend on many things, chief among them being your income. This, more than anything, is always the factor that's going to limit the size of the loan you can get, because a bank wants to be assured that you're able to service the debt for any loan they give you. Remember that the investment property you're purchasing will generate some income for you too, so be sure to factor that in when considering properties to buy.
At Money Empire, we're experts in all things personal finance. To learn more about working with us to build your mortgage empire, get in touch with a member of the team today.