Rupert Gough: tips for securing a deposit for an investment property

There has been a lot of talk in the past few months about the loan-to-value ratios (LVRs), particularly in relation to investment properties. When the Reserve Bank announced its intention to reinstate LVR restrictions, almost every bank upped the deposit requirements for investment purchases to 30 per cent and and then 40 per cent.

That means, in order to get finance approval on a $1 million investment property — a surprisingly common price bracket in Auckland, Wellington and Tauranga these days — an investor would need a deposit of $400,000.

It’s a common misconception that investors need that money sitting in their bank account — i. e. as cash. Homeowners can use the value in their own property to borrow this deposit, essentially meaning they are borrowing 100 per cent of the purchase for the new investment property (40 per cent on their own home or other investment properties and 60 per cent on their new property).

Homeowners can borrow up to 80 per cent of the house they live in. For example, a homeowner in a home worth $1 million and with a mortgage of $400,000 could borrow another $400,000 against their own home (up to 80 per cent) and use that money to buy a $1m investment property for a total mortgage of $1.4m ($1m for the new home and the original $400K they had on their personal property).

If you are applying to the same bank that has your personal mortgage, this is all done in one application; you are simply asking for the full amount of money for the new property. But if you have decided to apply through a different bank for your investment property this will be done over two applications; the first for $400,000 at your current bank and the second for $600,000 at the second bank.

You can, of course, use a mix of cash and equity. In the example above, if you had $50,000 in cash, you could choose to only borrow $350,000 to purchase a $1n investment property or add it to the $400,000 borrowing and purchase up to $1.125m.

I encourage investment buyers to look at how much deposit they can arrange (cash plus useable equity in their properties) before finding out whether their income will support the purchase. The deposit is a hard line in the sand and relatively easy to calculate whereas income has a number of factors that affect it — credit cards, monthly expense commitments, etc.

If you don’t know the value of your house, you can start by using OneRoof’s Valuation page. It can sometimes be good to use a slightly lower number than the one provided to allow for market movements while you apply for your mortgage.

Once you know this, the next task is calculating whether your income is enough to support that new mortgage (remember to include the new rent that will be received).