With the recent changes to interest deductibility and the bright-line test, property investment in New Zealand has once again become an attractive opportunity. If you’re an existing homeowner considering buying a rental property, leveraging the equity in your existing home can be an excellent way to jumpstart your property portfolio.
Here are five important considerations when it comes to using your equity to buy an investment property.
1. Determine how much you could borrow
Use an online calculator to calculate how much your mortgage repayments are likely to be with a higher mortgage. Work with a mortgage adviser to get a more accurate picture of your financial situation 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. Depending on your financial situation, your lender may 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 lets you know 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.
4. Structure your loan for flexibility
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 to maximise cash flow. With interest-only loans, the rental income covers the interest charged on the loan, keeping monthly repayments lower, but the principal amount is not paid until the property is on-sold.
5. Understand tax implications
Recent changes to interest deductibility and bright-line test rules in New Zealand impacts tax obligations. Starting 1 April 2024, property investors can claim back 80% of interest expenses, increasing to 100% by 1 April 2025. Furthermore, as of 1 July 2024, changes to the bright-line test period means that properties sold after this date will only be subject to the Brightline rule if the property is sold within two years of it being acquired.
Take the next step
Get help streamlining the process of using equity to buy an investment property. Work with a mortgage adviser who 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.