How to buy your second property
How to buy your second property without a cash deposit.
If you want to use your home equity to purchase an investment property, it's important to understand how LVR limits affect your borrowing options and which banks or lenders may be suitable for your situation. You'll also need to understand your borrowing power and consider the best tax and ownership structures based on your plans. This article will give you a bird's-eye view of how to use your existing home equity to prepare for and purchase your first investment property. For tailored advice please talk to one of our mortgage brokers.
It can be confusing to work out how much equity you have in your property and how much is actually usable. As a rule of thumb, banks generally allow you to borrow up to 80% of your owner-occupied property's value, meaning you need to retain at least 20% equity. For investment properties, banks typically lend up to 70% of the property's value, requiring a 30% deposit. However, lending up to 80% may be available for eligible new builds, and some banks may also consider this for existing investment properties, depending on their lending policies and your financial position. This is known as the Loan-to-Value Ratio, or LVR.
To work out your potential usable equity, take the value of your home, multiply it by 0.8, then subtract your outstanding mortgage. This equity could be used as a deposit for another property, alongside any savings or other available equity. Depending on your borrowing capacity and the bank's lending criteria, you may be able to access some or all of this amount.
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When people contact us, the first step of our mortgage advice process is to prepare a free borrowing summary. This is a comprehensive spreadsheet that includes CCCFA servicing calculations, up-to-date bank valuations of your property or portfolio, compound effect calculator to identify your retirement gap, portfolio equity calculations and more. Get your free borrowing summary here.
Banks will look at a combination of factors including your equity and income to determine how much more you are able to borrow. Different banks and lenders have different lending policies and servicing criteria, which can change over time. This means your current bank might not necessarily be the best option for your next property purchase. We can also help you understand the pros and cons of cross-securing your properties, as there can be benefits and drawbacks depending on your lending structure and long-term goals.
Having sufficient equity is only one part of the equation. Banks will also assess your income, expenses, existing debts and debt-to-income (DTI) ratio to determine how much additional lending you can afford.
If you want to know what bank or combination of banks/lenders will lend you, the easiest way to find out is to ask a mortgage adviser (from MHQ) to run the numbers across all the different mortgage servicing calculators with your income, expenses, and property info, and this will save you from damaging your credit score with full applications. It also saves you from wasting your own time. The snapshot is our online calculator and the best place to start to find your approximate options instantly. We have 3 online mortgage calculators you can use.
If you are curious about unlocking the ability to keep buying properties, then check out Blandon’s analysis here:
But if you only have time for one video, check out his take on capital gains vs cashflow. If you buy well and improve your properties, you just have to be a little patient and you’ll get your property portfolio built up over 5-20 years depending on your appetite for debt/risk.
This simple trick is used because it maximises returns and the amount you can borrow. Current market conditions offer opportunities for first home buyers, while existing homeowners may be able to purchase an investment property using their home equity through "leverage".
ANZ (one of the many banks MHQ works with) describes this perfectly on their website:
“Leverage” is when you buy an investment property using borrowed money instead of using your own. The more you borrow, the more you’re said to be “leveraged”. Leverage is one factor that can accelerate your investment return. If your investment property goes up in value, the higher the return on the actual money you’ve invested.
Using your home as security, you’ll be able to borrow more money, because you’re leveraging to buy more investments that will help grow your wealth over the long-term. This is also known as “freeing up equity”. What’s the best way to increase your borrowing for a second house?
The best way to increase your borrowing for a second house
There are a few options. You could arrange finance through your current bank, using your available equity and income to support the application. Depending on how the lending is structured, both properties may be cross-secured.
Another option is to get a revolving credit facility or mortgage top-up to access equity for your investment property deposit.
For example, let's say you have a $500,000 mortgage on a home worth $1 million and want to purchase a $700,000 investment property.
You can generally borrow up to 80% of your owner-occupied property's value, subject to bank approval and your ability to service the lending. In this example, 80% of $1 million is $800,000. After deducting your existing $500,000 mortgage, you have approximately $300,000 in usable equity.
You could use $210,000 of this equity as the 30% deposit for your $700,000 investment property through a mortgage top-up or revolving credit facility. The remaining $490,000 could then be financed through another bank, potentially allowing you to keep the two properties as separate securities, subject to lender approval.
Whether you plan to live in your new property or rent it out will influence your lending options. If you're converting your existing home into an investment property, banks generally apply a 70% LVR threshold rather than the 80% for owner-occupied properties. It's important to be upfront with your bank about your plans, and speaking with a mortgage adviser beforehand can help you understand your options and structure your lending appropriately.
Another option is to consider refinance your existing mortgage to access more equity and potentially secure a more competitive interest rate or cashback. You could also restructure your mortgage to improve cashflow or reduce repayments, which may help support borrowing for your second or third property.
It's worth comparing options across different banks, as your existing lender may not always offer the most suitable lending structure or competitive terms. Information about mortgage repayment calculators is here.
The aim is to buy another property using your existing equity without needing a separate cash deposit. Extending your mortgage term could also help reduce repayments and improve cashflow, although this may increase your overall interest costs. The key is to ensure any additional borrowing is affordable and aligns with your long-term investment goals. You can find out more about borrowing power calculators here .
The best way to buy a second home in New Zealand, and what the banking industry won’t tell you…
Here is a real-world example: Patrick purchased a house three years ago for $438,000 with a 20% deposit, making his mortgage approximately $350,000. Over the next three years, Patrick made regular mortgage repayments and completed some renovations, reducing his mortgage to around $330,000.
He then got an updated valuation on his property and discovered it was now worth $830,000. This meant his total equity had increased significantly to approximately $500,000, or 60% of the property's value. The renovations, mortgage repayments and capital gains had all contributed to his increased equity.
So, he decided to explore purchasing another property.
Based on an 80% LVR, Patrick could potentially borrow up to $664,000 against his existing home (80% of $830,000). After deducting his $330,000 mortgage, this leaves approximately $334,000 in usable equity to help fund his next purchase.
Using Patrick's income and expense details, we showed him how he could potentially use this equity to purchase another $800,000 property, subject to his borrowing capacity and bank approval.
Making regular mortgage repayments is one way to build equity in your home. Property values can also increase over time, creating additional equity through capital gains. However, property prices can fluctuate, and capital growth is never guaranteed.
Once we know more about your current situation, the strategies of negative gearing, capital gains, cash yields, renovations and revaluations will be explained in detail to you.
Unlike the property tutors you hear advertised on the radio/TV, we give this advice to you and our clients for free… we know it’s in our clients’ best interests to have all of this information available.
"Should I be converting my existing home into an investment property, or rent out my new property and stay put? Should I be using an LTC for tax purposes?”
These are harder questions to answer, but it's best to think about your most important end goal. Investors generally struggle with one of two things: either not enough income to borrow more money, or not enough equity to buy an investment property. If you're limited by income, living in the property with the lower rental appraisal may help maximise rental income. If you're limited by equity, living in the property with the higher valuation may provide more borrowing options.
This is because of the LVR limits imposed by the Reserve Bank on New Zealand banks (ASB, BNZ, Westpac, ANZ, Kiwibank, etc). If you're living in your more expensive property, you can generally borrow up to 80% of its value. If you're renting it out, the standard lending threshold is 70% of its value. Your goal should be to understand which situation works best for you before you start shopping for your next property.
To refinance your mortgage or not to refinance?
Refinancing can potentially save the average Kiwi homeowner thousands of dollars in interest repayments over the remaining term of their home loan, depending on their circumstances. You could also knock years off your mortgage by putting any interest savings or surplus cashflow from investments towards your own mortgage.
Now, if you're looking to extend your mortgage and increase your lending, you might need to take a longer mortgage term on your original home to reduce repayments and help you secure the new borrowing. Just keep in mind this could increase your total interest costs.
The reason it's often suggested to break-and-refix or refinance to a new bank is that you may have more bargaining power to secure a better interest rate, additional lending and some cashback to help you switch. You may also gain access to better loan products, such as offset facilities, or have the opportunity to restructure your mortgage to improve cashflow, reduce interest costs and pay down your debt more efficiently. Of course, you'll need to weigh these benefits against any break fees or refinancing costs.
You do not have to change banks, but it does sometimes make sense. Many people already have accounts with multiple banks, so you may simply be moving your mortgage to another lender and redirecting your income.
