Owning a home is a significant accomplishment, but did you know your property holds the key to unlocking even greater financial opportunities? The equity you've built in your home can be a powerful tool for building wealth and achieving your long-term goals. One way to leverage this equity is by using it to purchase an investment property.
What is home equity?
Simply put, home equity is the difference between your home's current market value and the amount you still owe on your mortgage. For example, if your home is valued at $1,200,000 and you owe $600,000 on your mortgage, your level of equitywould be $600,000.
Loan-to-Value Ratio (LVR) Rules: A Threshold for Investment
The Reserve Bank of New Zealand dictates the minimum deposit required for an investment property loan on a ‘second hand’ or existing property is 35%, meaning you’ll need a minimum deposit (made up of the equity in your house and/or savings) of at least 35% of the property’s purchase price (note exemption for new builds where no such requirement exists)
For example, if the investment property you're interested in costs $500,000, you'll need a minimum deposit of $175,000 (35% of $500,000).
Beyond the Deposit: Assessing Affordability
While the LVR rule sets a baseline, affordability goes beyond the initial deposit. Here are some key factors to consider:
● Your income and expenses: Can your current income comfortably cover the ongoing costs of the property, including mortgage repayments, rates, insurance, maintenance, and potential vacancies etc?
● Other debts: Existing debts like student loans or personal loans can impact your borrowing capacity and overall financial strain.
● Emergency fund: Having a healthy emergency fund is crucial for unexpected expenses related to the property or other financial emergencies.
● Investment goals and risk tolerance: What are your long-term investment goals? Are you comfortable with the potential risks associated with the property market, such as fluctuations in property values and rental income?
Making informed decisions about investment properties requires careful planning and expert guidance, and that’s where we come in. We can help you:
● Assess your financial situation: we will analyse your income, expenses, debts, and risk tolerance to determine your suitability for an investment property.
● Explore financing options: we will help you navigate different loan options, interest rates, and compare lenders to secure the best deal.
● Understand market trends: we will provide insights into the current and projected state of the property market in your desired location.
Remember, owning an investment property is a significant financial commitment. By carefully considering the LVR rules, your affordability, and seeking professional advice, you can make an informed decision that aligns with your financial goals and risk tolerance. Get in touch anytime for a no obligation chat and let us take care of the rest. We have some great tools and calculators we can share for calculating cashflow impacts and returns on investment property that we would be happy to share.
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