Let’s chat about investment properties deposit, where you can find it and how it works.
Where can I find my deposit?
So you’re sitting there thinking perhaps you’d like to invest in property? Property investing has been the path to financial freedom for many Kiwis; with the right advice and support, it could be yours too. There are a few things that you will need to make sure that you have before venturing down the property investment path.
The biggest one is deposit – either equity in your own home or cash. This is your skin in the game and you’ll need this to put down a deposit on your new investment property.
Where can I find my deposit?
Let’s get a bit deeper into this deposit. When you purchased your owner-occupied home you were asked for a deposit of 10 to 20% of the purchase price, but with an investment property, you will need (from May 1st 2021) a minimum deposit of 40% of the purchase price.
The Reserve Bank (the big boss bank that oversees NZs banks and monetary policy decisions) has recently changed the deposit amount required for investment properties. This is the Reserve Banks attempt at creating a more even playing field for everyone attempting to buy property.
The Reserve Bank is trying to create a market where everyone has the ‘same’ opportunity to purchase housing. By raising the investor deposit the Reserve Bank is trying to hold back investors from artificially inflating the property market by reducing demand.
So, back to this deposit, where do we find it? As mentioned above you can either use the equity that you have available in your own home OR use cash.
What is equity in your own home?
Well, it is put simply – money! With a few catches, equity in your home is the market value of your home less the amount you owe on your mortgage. Confused?
Let’s do some quick math to help.
Say you have searched your house on One Roof and it says your house is worth $800,000 and your home loan is only $300,000.
Your bank will generally allow you to borrow up to 80% of the value of your own home.
80% of $800,0000 is $640,000 AND $640,000 less your $300,000 home loan is $340,000.
The $340, 000 you can treat like a cash deposit to put down on your investment property.
In this example, $340,000 is the equity you have available in your home to put towards a rental property.
With a 40% deposit required, this would allow you to spend up to $850,000 on investment property, provided you could meet your banks’ debt servicing requirements.
Therefore, with some help from your amazing mortgage advisor, you potentially could borrow up to $850,000 for your investment property.
As exciting as this is, there is still one more piece of the investment property puzzle missing – serviceability – do you have enough income to afford an investment property?
This is another question entirely and one than cannot be summed up neatly into a blog post, call us if you think you are in the market for an investment property and we will endeavour to help you out
While we’re home loan experts, our blog posts are for general information purposes only and are not intended as financial advice. If at any stage you need personalised advice, get in touch on 06 8788 4444 or Ben or Mark.