Many Kiwis look to invest in property for a nest egg in retirement and most will put their existing home on the line for the deposit. Interestingly a common noob error is considering the difference between your home value and mortgage as usable equity. Its not, as you have to consider that your main bank will want some equity left for the existing home.
How much can you use?
Generally up to 80% of the value of your home less the existing home loan is usable equity. Which depending on the lending environment can mean it must support 15%-30% of the investment property price. Of course it is important to seek specialist advice from a good mortgage adviser(like us) as there are many nuances. If you are looking at using two banks, you can raise the deposit as a loan from the spare equity and use that as a deposit on the investment with another bank.
Why two banks?
Using a new bank for the investment property can have its advantages further down the road. Generally in the distant future if you wanted to sell down property you have more control over the cash from the sale.
Using one bank for many properties generally means that they are cross secured. This means if you were to sell one, you may find the bank would decide how much of the funds you can get. As at times they could insist on paying down debt not related to that particular property. The other aspect of this is if you are trying to raise funds on one property the value of the other property can have an impact.
These issues are resolved if the investment property is with a different bank.
What about the accounting?
Your accountant would want to track the interest on the loans used to purchase an investment property. You can have that debt spread across two banks. Ensure that any deposit raised from the original bank, is kept as its own separate home loan to make your accountants life easier.
Building resilience in your cashflow
Property investment can take some time to bear fruit, its the time in the market not the timing. For many of our clients that embark on this journey we will look to stretch the maximum home loan term on their home. This is to make the minimum repayments across all loans comfortable. Taking interest only on the new debt also helps with this.
Of course the risk here is that you pay more interest in the long run. So this must be counteracted by managing the right amount of flexible home loans that will allow for voluntary repayments. It is important to use any buffer in the cashflow to build up a war chest as expenses can come up.
Before using your equity
It also vital to digest your plans for the coming years. Property is a long game and buying an investment ties down usable equity. So it can delay other plans if the market moves in the wrong direction. Plans such as, buying a bigger home, renovations etc. So it is important to discuss what is on the horizon with a mortgage adviser. We can play out different scenarios to make the path ahead visible.
