Leveraging your mortgage to buy a rental property

Ever thought about buying a rental property? It’s a goal for many Kiwis, and if you already own your home, you could be closer to that goal than you think.

By unlocking the hidden value in your home, known as equity, you could use your current mortgage to help get that investment property. So, let’s break this down a bit further and make it super easy to understand.

What’s equity all about?

Equity, in homeowner terms, is the portion of your home that you truly own. It’s the difference between your home’s current market value and the remaining balance on your mortgage. Suppose your home’s value is $800,000 and you owe $300,000 on your mortgage. In that case, you have $500,000 equity in your home.

How much can you borrow?

Now, using the previous example, how do you transform that $500,000 equity into a deposit on your first rental property? Most lenders allow homeowners to borrow up to 80% of their owner-occupied home’s value, including any existing mortgage balance.

In our example, that means you might have access to $340,000 ($800,000 x 80% – $300,000) to use towards an investment property. However, keep in mind that lenders don’t just look at home equity – they’ll also consider your income, credit history, and other factors. That’s where the expertise of a mortgage adviser can come in handy.

We can walk you through the lending criteria, ensuring you’re fully informed. Plus, we can work with you on finding a mortgage structure that’s appropriate for your needs and goals.

Finding the right property

Once you have a clear idea of your borrowing power, it’s time for the fun part – property hunting! Remember, buying a rental property is not just about buying a house that fits your budget, or that you’d live in. It’s about finding a property suitable to be rented out based on its location, potential rental income, property condition, and growth potential.

We recommend you contact an investment adviser for more detailed information and guidance on what to look for in an investment property. Don’t forget the tax implications as well as other key costs to factor in, like property insurance, council rates, home maintenance and (if you need it) property management. Plus, as a landlord you will have to meet specific legal obligations, and ensure that the property meets the Healthy Homes standards.