If you’re looking to purchase an investment property in New Zealand, one of biggest questions you’ll face is: “How much deposit do I need?” The amount of deposit required can significantly impact your property investment journey, affecting everything from your borrowing capacity to the types of properties you can consider.
In this comprehensive guide, we’ll explore what you’ll need for a minimum deposit on an investment property NZ, why deposits can vary, and options for acquiring property with smaller deposits.
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What is the Minimum Deposit on an Investment Property in NZ?
Deposit requirements for investment properties in New Zealand are generally higher than those for owner-occupied homes. This is because lenders view investment properties as higher-risk loans.
Standard Deposit Rates for Investors
If you want to buy an existing property as an investment, you’ll need a 35% deposit. This means if you want to purchase a property worth $500,000, you’ll need to have at least $175,000 as a cash deposit or equity.
Low Deposit Options: 5% and 10% Deposits
While 30% is the standard, there are some options for investors looking to enter the market with a lower deposit. However, these options are limited and often come with additional conditions:
1. New Build Properties: If you want to buy an investment property off the plans you’ll need a 20% deposit.
2. Using Equity: If you already own property and have equity in your home, you may be able to use this equity as security. It depends on how much you owe and the value of your property. If your home is worth $800,000 and you owe $640,000, your equity is $160,000.
Banks generally allow you to use equity exceeding 20% of your home’s value as a deposit. In this case, if 20% of your home value is $160,000, any equity above this can be used. So in the above scenario, you’d need to pay a little more off your home.
3. Non-Bank Loans: Some non-bank lenders might offer investment loans with deposits as low as 20%.
How Much Deposit Do I Need? A Practical Guide
To give you a clearer idea of how much deposit you might need, let’s break it down based on different property values:
1. Buying a house worth $400,000:
– 35% deposit: $140,000
– 20% deposit (new build): $80,000
2. If the house is worth $600,000:
– 30% deposit: $210,000
– 20% deposit (new build): $120,000
3. Purchasing property worth $800,000:
– 30% deposit: $280,000
– 20% deposit (new build): $160,000
Remember, these are just examples. The actual deposit you need may vary depending on factors such as your financial situation, the specific property, and the lender’s requirements.
What Impacts an Investment Property Deposit?
Several factors can influence the deposit you’ll need to buy an investment property in NZ:
1. Property Type: New builds often require lower deposits compared to existing properties.
2. Location: Properties in high-demand areas might require larger deposits.
3. Your Financial Situation: Your income, existing debts, and credit score can affect how much a lender is willing to let you borrow.
4. Lender Policies: Different banks and financial institutions have varying policies regarding investment property loans. For banks, these are set by the Reserve Bank of New Zealand, who have strict loan value ratios. You may find it easier to buy a property using a second tier lender who are not bound by the same rules. These may attract higher interest rates and have other conditions you need to be aware of. Our mortgage brokers can help explain this to you.
5. Market Conditions: In a hot property market, lenders might tighten their lending criteria, and require a higher deposit.
Strategies to Fund Your Investment Property Deposit
If you’re struggling to come up with a large deposit, consider these strategies:
1. Use Equity in Your Home: If you already own a property, you might be able to use the equity as security to invest in a property.
2. Save Aggressively: Create a strict budget and savings plan to build your deposit over time.
3. Consider a Guarantor: Some lenders allow a family member to act as a guarantor.
4. Joint Venture: Partner with friends or family to pool resources to fund the deposit.
5. Look for New Builds: As mentioned earlier, new build properties often come with lower requirements.
Can I Buy an Investment Property with a 10% Deposit?
While it’s rare, there are occasional opportunities to purchase an investment property with a 10% deposit in New Zealand. These usually come with specific conditions:
1. New Builds in Certain Areas: Some developers offer properties with 10% deposits to attract investors, especially in areas with high rental demand.
2. Special Lender Programs: Occasionally, lenders may run promotions allowing lower deposits. Our mortgage brokers can access special deals not available to the general public and can help you achieve your property investment goals.
3. Using Substantial Equity: If you have significant equity in another property, a lender might allow you to purchase an investment property with a lower cash deposit.
Use an Investment Property Deposit Calculator
To get a clearer picture of how much deposit you might need, consider using an investment calculator. They typically ask for information such as:
– Property purchase price
– Your income
– Existing debts
– Desired loan term
Using this information, the calculator can give you an idea of how much you could borrow based on different deposit amounts.
Property Insights: Understanding the NZ Market
Before deciding to invest in residential property and determining your deposit, we recommend gaining some insights into the New Zealand property market:
1. Regional Variations: The deposit to buy an investment and property prices can vary significantly between regions. For example, Auckland typically requires larger deposits due to higher property values.
2. Rental Yield: Consider the potential rental income of the property. A higher yield might make it easier to secure financing.
3. Capital Growth Potential: Look at historical data and future projections for capital growth in different areas.
4. Legal Requirements: Be aware of legal requirements for rental properties in NZ, such as the Healthy Homes Standards.
Buying Your First Investment Property – The Next Steps
If you’re ready to start investing in property, here are some next steps:
1. Assess Your Finances: Determine how much you can realistically save for a deposit.
2. Speak with a Mortgage Broker: Our experienced Auckland brokers can help you understand your borrowing capacity and find the best home loan options.
3. Research the Market: Use resources like Trade Me Property and real estate websites to understand property prices and rental yields in different areas.
4. Consider Professional Advice: Consult with a financial adviser or property investment specialist to create a strategy aligned with your investment goals.
5. Start Saving: If you don’t have enough for a deposit yet, create a savings plan to reach your goal.
Understanding Rental Yield
Rental yield is a key metric in evaluating the profitability of an investment property. It is calculated by dividing the annual rental income by the property’s value. For example, if a property generates $30,000 annually in rent and is worth $500,000, the rental yield is 6%.
A higher rental yield indicates better returns on your investment. However, consider other factors such as property expenses, maintenance costs, and insurance. By assessing rental yield, you can make more informed decisions about potential investments and ensure they align with your financial goals.
Your Property Investment Journey
Purchasing an investment property in New Zealand can be a rewarding financial strategy, but it requires careful planning and a solid understanding of deposit requirements. While the standard 35% deposit can seem high, there are options available for those looking to invest in property with less capital.
Remember, the deposit is just the beginning of getting into investment property. You’ll also need to consider ongoing costs such as mortgage repayments, property management fees, maintenance, and potential periods of vacancy.
By thoroughly researching the market, understanding your financial position, and exploring all available options, you can make an informed decision about how much deposit you need and what type of property best suits your goals.
Whether you can put down a 35% deposit to buy or you’re exploring lower deposit options, the key is to ensure that your investment strategy aligns with your long-term financial objectives and risk tolerance. With the right approach and careful planning, property investment can be a valuable addition to your financial portfolio.
