Have I got Equity to Buy a Rental Property?

Buying a rental property is often a Kiwi dream to build equity for retirement. In some instances, it can provide a passive income IF rental income exceeds all outgoings.

Normally, depending on Reserve Bank restrictions, a 30% deposit is required for buying an existing house as a rental. 15-20% deposit usually required for a new build rental property. 

Often buyers will “leverage” against existing equity and 100% finance a rental property. Being able to do this has created many landlords in the market especially when interest rates are low and banks are keen to lend!

So how do you work out if you have enough equity to buy a rental property?

Here is a very simple way of working it out. Factoring in (at the moment), the most you can borrow against your existing owner-occupied house is 80% of the value to help create the 30% deposit needed. You may need to check your banking app to see what value the bank holds for your house. This can change often. 

You need to factor in existing lending to equation as well, so here is an example of how it works:

$1,000,000 owner occupied property with $325,000 owing on the mortgage. 

Maximum lend is 80% being $800,000, less existing mortgage say $325,000. This leaves $475,000 of equity able to recycle as a deposit on a rental. 

$475,000 divided by .30 (30% deposit minimum on an existing house) = $1,583,333 possible budget on a rental property(s) that could be 100% financed. 

There are a couple of ways that could work:

1. You 100% finance up to $1,583,333 of rental property(s) with the same bank. Convenient BUT it then means one bank has a hold over all your properties. So, if you sold one, the bank could use ALL the proceeds to repay debt. Meaning you cannot hold back any sale proceeds if that was the plan. 
2. You borrow up to $475,000 from your existing bank to use as a 30% deposit (like a top up of the existing mortgage), then borrow 70% $1,108,333 from other bank(s) to mortgage against the new rental(s). That way, no one bank has a hold over all your rentals, making it easier to hold back proceeds at sale time if the rental was mortgaged standalone. Spreading your lending means no one bank can pull the rug out from under you across all your rentals if you hit financial difficulty
3. Another option, depending on the numbers, is you used the $475,000 ‘top up’ and paid cash outright for a rental worth up to $475,000, with no mortgage on it. That again makes it easier to sell the property down the track and keep the proceeds. Or use the new mortgage free rental as collateral to go to another bank to buy a third rental down the track. You would still get tax benefits on the $475,000 even though the property had no mortgage on it, as the purpose of the borrowing was for a rental property. But always seek accounting advice on it! Borrowers do often still use a Look Through Company (LTC) which doesn’t change the above dynamics but adds a layer of cross guarantees. 

The above scenarios do not take into account serviceability (borrowing power). So, you may have the equity to buy a rental, but not the income. 

If splitting lending between banks, each bank will assess your mortgage application based on the lending (existing and proposed) you have with them and elsewhere. 

So, if your existing bank approves you $475,000 to use as a deposit on a rental, they will also have to add into their serviceability calculator the $1,108,333 you propose to borrow elsewhere. But also factor in proposed rent(s) on spending that much on a rental(s). Conversely the new bank(s) lending you the $1,108,333 will also factor in the $325,000 existing lending and $475,000 new lending you got at your existing bank for the deposit. 

Feel free to reach out to Craig Pope Mortgage Adviser to work a scenario more specific to your personal situation.