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Investment Home Loans in New Zealand

An investment home loan, also referred to as an investment property loan or mortgage, is a specialised financial product tailored for individuals seeking to purchase a property not as a personal home, but as an investment. Such investments could involve purchasing a property to lease, or buying with the intent to improve and sell at a profit later. These loans come with unique terms and conditions, here we’ll explore some of the nuances in investment home loans.

The New Zealand Perspective on Investment Home Loans

In New Zealand, investment home loans have gained traction as a popular tool for wealth creation. Supported by a sturdy housing market and a culture that prizes property ownership, many New Zealanders are exploring property investment as a viable financial strategy. As per the Reserve Bank of New Zealand, investment property loans represented roughly 24% of new lending as of December 2020, underscoring the significance of this financial product in the local market. This article endeavors to offer a comprehensive understanding of investment home loans in New Zealand, delving into their role in the property market, the procedure for securing such a loan, and the potential benefits and risks associated. The article is designed to guide readers from a fundamental comprehension of home loans, through the specifics of the New Zealand property market, to the intricate details of investment home loans in the country. It also addresses practical aspects such as acquiring your first rental property, understanding the legal and regulatory landscape, and effective financial planning.

The Significance of Property Investment in New Zealand

Property investment occupies a pivotal role in New Zealand’s economy and cultural ethos. The property market has consistently outperformed over the years, often yielding better returns than other investment avenues. As of September 2023, the median house price in New Zealand stood at approximately NZD $899,000 (qv.co.nz), and while this is approximately 4% lower than 12 months prior, it is still a whopping 210% up from 10 years ago (2013 QV data). This upward trend has rendered property investment appealing for many New Zealanders, who view it as a route to financial stability. Moreover, owning multiple properties is often perceived as a symbol of success, further fuelling the popularity of property investment.

Understanding Home Loans

A comprehensive understanding of home loans is crucial for anyone looking to purchase a property, whether for personal use or investment purposes. This section delves into the definition, types, and importance of home loans, as well as the role of home loan specialists.

A home loan, often referred to as a mortgage, is a sum of money borrowed from a financial institution or bank to facilitate the purchase of a house. The property in question serves as collateral for the loan. This means that if the borrower defaults on the loan repayment, the lender reserves the right to seize the property. Home loans generally have a fixed term, such as 25 or 30 years, and the interest rate may be either fixed or variable.

There are several types of home loans, each designed for specific purposes and with varying terms and conditions. Below we explore some of the most common types:

1. Residential Home Loans
Residential home loans are tailored for individuals or families intending to occupy the property as their primary residence. These loans typically offer lower interest rates and more flexible repayment terms compared to other loan types, as they are deemed less risky for lenders.

2. Commercial Property Loans
Commercial property loans are designed for properties that will serve business purposes, such as office buildings, retail spaces, and warehouses. These loans generally come with higher interest rates and stricter terms due to the elevated risk associated with commercial properties.

3. Investment Home Loans
Investment home loans are specifically intended for properties that the borrower plans to rent out or sell for a profit. These loans are very similar to residential home loans however, different assessment criteria and conditions are applied. They are attractive as they can offer substantial potential returns through rental income and property appreciation.

Home loans are a vital instrument in property investment. They provide the necessary capital for investors to acquire properties, which can yield income through rent or appreciate over time for a profit when sold. Without home loans, many individuals would lack the financial capacity to invest in property. Moreover, the interest on investment home loans is often tax-deductible, further enhancing the profitability of property investments.

Home loan specialists, also known as mortgage brokers, are instrumental in the home loan process. They serve as intermediaries between borrowers and lenders, aiding borrowers in finding the most suitable loan products that align with their needs and financial circumstances. They also assist with the loan application process, providing advice on how to bolster chances of approval, and can negotiate better interest rates on behalf of the borrower. Their expertise and market knowledge can be invaluable, particularly for first-time property investors.

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Characteristics Of Investment Home Loans

Loan to Value Restrictions (LVR)
The structure of an investment home loan in NZ generally requires the borrower to make a down payment, currently a minimum of 35% of the property’s value due to RBNZ LVR restrictions. The lender then covers the remaining balance. The loan is then repaid over a predetermined term, typically a maximum of 25 years, though some lenders may allow a longer term.

Taxation and Interest Deductibility
While investment home loans bear similarities to regular, or owner-occupier home loans, there are significant differences. A notable difference also exists in the tax implications. In NZ, the interest on an investment home loan has historically been tax-deductible, as it’s deemed an expense related to income generation. However under the recent Labour government this tax-deductibility has been partially removed, making property investment less profitable and less attractive in many cases. The exception to this rule is when purchasing a newly built property. At the time of writing, a National-lead government coalition is forming under which this interest deductibility removal will be wound back.

The Brightline Test
The Brightline test can be considered a set of rules to determine if income tax should be applied to the sale and purchase of a property in New Zealand. It can be considered a type of capital gains tax, though this is a highly debated topic politically. The Brightline test was first introduced in 2015 applying to properties bought and sold again within a period of two years. In 2018 this was modified and extended to a 5 year period, before being further extended to 10 years from 2021, with some other nuances also being introduced, for example newly built properties were only subject to a 5 year term. The most notable exemption of the Brightline test is for the personal home, which is limited to one property. There are also some other considerable nuances here, meaning an individual should seek independent taxation advice.

The Future of the Brightline Test and Interest Deductibility
Under the newly elected National led government from Q4 2023 onwards, it is highly likely that changes to both the Brightline test and interest deductibility will occur. These changes are expected to benefit property investors significantly, increasing profitability and encouraging investment activity. Based on promises made by the National party during their election campaign, the Brightline test will be reduced again to two years, and interest deductibility will be progressively enabled again over a few years.

Benefits and Risks of Investment Home Loans
Investment home loans offer several benefits. They provide a pathway to property acquisition that might otherwise be financially inaccessible, enabling investors to leverage their capital and potentially reap substantial returns. The tax-deductible interest serves as another advantage, as it can help mitigate the overall cost of the loan. However, like any financial product, investment home loans also carry risks. The property market is inherently unpredictable, and there’s no surety of a return on investment. If property values plummet, investors could find themselves owing more than the property’s worth. Moreover, if the rental income falls short of covering the loan repayments, investors will have to offset the deficit.

Buying Your First Rental Property in New Zealand

Deposit
The journey towards owning your first rental property in New Zealand starts with a considerable financial commitment – the deposit. This initial capital outlay is mandated by not only every reputable lending institution, but also the Reserve Bank of NZ (RBNZ). For long term mortgages, currently limits require borrowers to put up a minimum of 35% of the property’s purchase price. For example, if a property worth NZD$500,000 has caught your attention, you would need to put up at least NZD$175,000 for the deposit. There are a variety of ways to produce this deposit however, including refinancing your existing home loan to release equity, or cross-securing another property that you own.

Affordability Considerations
Prior to diving into property investment, it’s essential to evaluate your financial capacity. Affordability extends beyond the ability to meet the deposit requirement. It’s important to take into account ongoing costs such as mortgage repayments, insurance, rates, and property management fees. Every bank has their own individual policy and calculators that will help their staff and your local mortgage adviser determine affordability. Public calculators are also available and can provide some assistance though they are quite basic and don’t take into account all factors.

Factors to Consider When Buying Your First Rental Property:

Location: The location of your rental property plays a significant role in its potential for capital growth and rental yield. Areas with robust infrastructure, close proximity to amenities such as schools, hospitals, and public transport, and future development plans tend to attract a larger pool of tenants and command higher rents.

Potential Rental Income: To gauge the potential rental income, conduct research on the average rent prices in the area where the property is situated. Websites like Trade Me Property and realestate.co.nz offer comprehensive data on rental prices across various regions in New Zealand.

Maintenance Costs: Property ownership comes with ongoing maintenance costs. These can encompass minor repairs, major renovations, and regular property upkeep. It’s recommended to allocate some funds on a regular basis to take care of these costs.

Property Management If you live a significant distance from the investment property, or are time-poor it’s likely you will want to employ a property manager to liaise with tenants, collect rent, and ensure that all of the rules and regulations are kept to. Property managers can cost between 7%-10% of the rent collected each month.

Role of KiwiSaver Funds in Property Investment For many first home buyers in New Zealand, KiwiSaver funds present a viable avenue to accumulate their deposit for the purchase. Unfortunately Kiwisaver funds are not eligible for use to purchase an investment property.

Key Players in the NZ Investment Home Loan Market

The financial landscape of New Zealand is predominantly influenced by several key players offering investment home loans. This includes the “big four” Australian-owned banks – ANZ, Westpac, ASB, and BNZ, supplemented by New Zealand-owned banks such as Kiwibank, TSB, SBS, The Cooperative Bank, Heartland Bank and a variety of non-bank lenders including Resimac, Liberty, and Pepper Money.

Comparison of Loan Products, Rates, and Terms
These institutions offer a diverse range of loan products, each tailored to suit different investor needs. For example, ANZ offers both fixed and floating rate loans, with terms spanning from six months to five years. Westpac provides a ‘Choices Offset’ home loan, enabling investors to counterbalance their home loan with their savings account, potentially saving a considerable amount in interest. However, the market isn’t solely about the big banks. Non-bank lenders like Resimac provide flexible lending criteria and loan terms, presenting an appealing option for those who may not conform to the conventional borrower profile. It’s essential for investors to compare these products, rates, and terms to identify the best fit for their financial situation and investment aspirations.

Interest Rates
Mainstream banks are often very similar on interest rates, with fierce competition breaking out at times. Typically a small delta will emerge between banks for particular terms for example a 12/24/36 month rate could vary by up to 0.2%. Quality of the secured property and the application can also affect what rate will be offered by the lender.

Interest-only Periods
Like mortgage for owner-occupied properties, fixed interest rate terms are commonplace in investment home loans with terms available between 6 months to 5 years. One significant difference is that many lenders are happy to offer a longer 5-year interest-only period on the mortgage, while owner occupiers are typically only afforded a maximum of 2 years at a time.

Maximum Loan Terms
One other difference is the maximum loan term offered on by main banks on investment home loans. Instead of the usual maximum of 30 years, many lenders including BNZ, ANZ, and ASB restrict the maximum loan term to 25 years. The trade off however, is that older investment owners can often acquire these terms past retirement age as the mortgage repayments are coming from the tenant and not the owners income.

Short Term Lending
Main bank lenders typically do not like to lend on shorter terms for the purposes of property trading or flipping. While top-ups for renovations or improvements are commonplace, if a property investor wishes to trade property they will need a different lending product and provider to achieve this. This is where non-bank lenders can come into play. These non-bank lenders offer shorter terms typically only 6-12 months, a higher interest rate, and sometimes a higher LVR, however they do not require any evidence of long term servicing (rental income). Instead they assess the borrowers repayment strategy in terms of how they will improve the value of the property and sell it again within the shorter timeframe.

Importance of Consulting with a Home Loan Specialist
Given the intricacy and diversity of investment home loans, consulting with a home loan specialist can prove invaluable. These professionals possess an extensive understanding of the market and can provide bespoke advice based on an investor’s specific needs and circumstances. They can assist investors through the application process, help them comprehend the terms and conditions of different loan products, and potentially negotiate more favourable rates.

In conclusion, while there are several key players in the NZ investment home loan market, each offering a spectrum of products and services, the optimal choice depends on the individual investor’s needs, financial situation, and investment objectives. A home loan specialist can provide valuable guidance to navigate this complex landscape and make an informed decision.

Predicted trends in the New Zealand property market and their impact on investment home loans

The New Zealand property market is an ever-evolving entity, with its ebbs and flows governed by a myriad of factors. As we gaze into the future, experts foresee several pivotal trends that will shape the market, and consequently, the realm of investment home loans.

One crucial trend is the anticipated population surge in major urban locales such as Auckland, Hamilton, Tauranga, Wellington, and Christchurch. Immigration is currently surging with a net gain of over 100,000 people entering the country over the most recent 12 months in 2023. As per Statistics New Zealand, the national population is projected to touch 5.8 million by 2030, with a significant portion residing in these urban hubs. This growth is poised to stoke the demand for housing, potentially escalating property prices and opening up profitable avenues for investors. However, it also poses challenges, as heightened competition may trigger a rise in home loan interest rates.

Another expected trend is the transition towards sustainable housing. With New Zealanders growing more environmentally aware, the demand for energy-efficient homes is predicted to ascend. This could influence the investment home loan market by carving out a niche for loans tailored to green building initiatives. Technology is revolutionizing numerous industries globally, and the home loan sector is not immune to this wave. In New Zealand, technological advancements are projected to streamline the home loan procedure, rendering it more accessible to prospective investors.

Experts maintain a generally buoyant outlook on the future of investment home loans in New Zealand. According to Tony Alexander, a distinguished NZ economist, the robust demand for housing, along with the country’s steady economy, augurs well for property investors. However, experts also advise investors to remain vigilant of potential risks. As we have seen in recent years, interest rates can vary, and shifts in regulatory policies can also sway the investment home loan market. As such, they suggest that aspiring borrowers engage a home loan specialist to steer through these intricacies.

In conclusion, the future of investment home loans in New Zealand appears promising, propelled by population growth, a shift towards sustainable housing, and technological advancements. However, as with any investment, it is vital to stay updated and seek expert counsel to fully capitalize on these opportunities.

Final thoughts regarding Investment Home Loans

Investment home loans can serve as a potent tool for those aspiring to enter the property market in New Zealand, or expand their investment portfolio. However, it’s imperative to approach this with a clear understanding of the potential risks and benefits. Always consider the affordability of your investment and stay informed about the impact of market trends and regulatory changes on your investment.

Keep in mind that there are some nuances and details that can restrict your ability to borrow and prevent your progress as a property investor. We recommend consulting with a financial advisor or a home loan specialist who can provide guidance tailored to your specific circumstances and goals.

Whether you’re a first-time investor or have previous experience, consulting with a home loan specialist can help you make informed decisions and potentially save you a significant amount of money in the long run.

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