Property investment in New Zealand can be an excellent long-term wealth building strategy, but one must make appropriate risk-management decisions along the way. A significant percentage of NZ investment properties are owned by large investment groups with more than 6 properties. However, with the right mortgage options, a healthy deposit, and a bit of help, you can purchase your first investment property and develop a viable income stream.
How Do Investment Property Mortgages and Owner Occupied Mortgages Differ?
Your first step towards managing a profitable investment property is understanding the type of funding options available and how they differ from an owner occupied mortgage. From the perspective of a lender, offering a mortgage on an investment property comes with a greater risk than a mortgage for an owner-occupied home.
Lenders mitigate this risk by requiring a higher deposit. A traditional home mortgage requires anywhere between 10 and 20 percent. An investment property mortgage will require a deposit of at least 30-40 percent. Thus, one of the first steps towards securing your loan is identifying potential properties and ensuring you have adequate capital or equity.
What Type of Investment Property Mortgage Should You Choose?
There are three types of mortgage options you need to consider. They are:
* Interest-only mortgage
* Fixed rate mortgage
* Floating rate mortgage
An interest-only mortgage only requires that you pay the interest on the loan during the loan period. You repay the entirety of the loan when the term ends. The typical term for interest-only investment property mortgages in NZ is two to five years. This type of loan will maximize your available funds during the loan term, but results in higher payments over long periods and a higher risk of default when the term ends.
A fixed-rate mortgage requires you to repay the amount borrowed alongside an established interest rate that does not change. In comparison, a floating mortgage includes an interest rate that can go up or down alongside the lender’s mortgage rates. If it’s your first investment property and you want to minimize risks as much as possible, then a fixed-rate mortgage is a straightforward solution.
Should You Use a Bank or Mortgage Broker?
Many new investors make the mistake of simply using the bank they are most familiar with. However, there are many different lenders available with varying interest rates, hidden fees, acceptance rates, and other distinctions.
Banks are easy to use, offer competitive incentives, and are often open to negotiation on certain terms and fees. However, they tend to be more careful with their lending and will require you to have a decent credit rating. They can only recommend their own products, which may not be the best option for your situation.
Mortgage brokers connect clients with multiple lenders in their area. They can help you find lenders who meet your specific criteria. Brokers in NZ are also certified financial advisors and can help you through many of the different obstacles you might face during the lending process.
Putting It All Together
If you’re a first-time investor, then managing risks and expenses should be your primary concern. You never want your first investment to fail, which is why it’s best to take the safest possible route to success. That generally means finding a competitive fixed-rate mortgage through a reputable mortgage broker.