Getting a mortgage for rental property

If you’re like the majority of homebuyers, you’ll require a mortgage to finance your new property purchase. To qualify, you must have a stellar credit score and own payment. Without these, the conventional path to homeownership may be inaccessible.

While a rental property mortgage is similar to a principal house mortgage in many ways, there are some significant distinctions. To begin, rental property loans have a greater default rate than other types of loans, owing to the fact that borrowers experiencing financial difficulties prioritise their primary residence’s mortgage first. Due to the increased risk, lenders often charge a premium for rental properties.

There are also underwriting rules to consider, which are typically stricter for rental homes. Mortgage lenders, in general, are concerned with the borrower’s credit score, down payment, and debt-to-income ratio. The same principles apply to rental property mortgages, but the borrower will likely face stricter credit score and debt-to-income ratio requirements—as well as a larger minimum down payment. Moreover, the lender may do a thorough examination of the borrower’s employment history and income, as well as enquire about the borrower’s prior experience as a landlord.

Numerous lenders have lower lending limitations for investors (i.e., they lend the majority of their house loans to owner-occupiers), and you will often need a 40% deposit according to the Reserve Bank of New Zealand’s LVR rules.

In general, lenders seek the following information from borrowers before approving a rental property mortgage:

  • Credit score: A minimum of 620 is required, with better rates and terms available for scores of 740 and above.
  • Down payment: LVR lending limitations on loans secured by investment property have been tightened in response to rising housing market concerns in that sector. Loans with a high LVR fall into this category if they exceed 60% of the property’s value (40 percent deposit). Loans with a high LVR cannot account for more than 5% of a bank’s total new lending in this segment.
  • Debt-to-income ratio (DTI): The DTI indicates the percentage of a borrower’s monthly income that is spent on debt repayment. Though the limitations are more lenient for primary residence mortgages, borrowers must have a DTI of between 36% and 45% to be eligible for a rental property loan.
  • Savings: Along with a favourable debt-to-income ratio, borrowers should have sufficient funds in the bank to cover three to six months’ worth of mortgage payments, which include principle, interest, taxes, and insurance.

Consider the following before making a purchase:

Exemption for new construction

Loans to individuals who are constructing a new property are exempt. The borrower must either commit to the purchase early in the development process or purchase the residence directly from the developer (within six months of completion). The exemption is available to both owner-occupiers and investors in residential real estate. The LVR guidelines make no provision for the amount of a deposit required for new houses.

Exemption for remediation

Loans are exempt if they are used for remediation (e.g., to address concerns with weather tightness), to bring a dwelling up to current building rules, or to comply with new rental property standards (for example, insulation). The exemption is available to both owner-occupiers and investors in residential real estate.

Stay away from a fixer-upper

It’s alluring to hunt for a house that you can purchase cheaply and convert into a rental property. That is generally not a good idea if this is your first property. Unless you have a contractor that performs quality work on a budget—or unless you are experienced at large-scale home improvements—renovating is likely to be prohibitively expensive. Rather than that, seek out a home that is priced below market value and requires only minor repairs.


There are tax issues associated with owning a residential investment property. Rent income is taxable, which means you must file a tax return each year. Gains on the sale of real estate may also be subject to taxation.

Tax rules often change and can be complex, so it’s essential to get regular guidance on your personal circumstances from an independent tax adviser or accountant. You can also find a tax guide on rental income on the IRD website.

There are a lot of different things to consider when buying a second home, our experienced broker would love to help you go through the process and all aspects of purchasing a second property. If you would like to know more about growing your property empire and make your mortgage work for you, talk to our expert broker today.

What kinds of properties are best to invest in?

Are you wanting to expand your investment portfolio by purchasing a residential rental property? If you make the right choice, investing in real estate can be both thrilling and rewarding. However, income and benefits aside, real estate investing might be intimidating for a first-time investor.

Investing in real estate is similar to searching for a diamond in the rough. You want it to look decent, but not so good that the price becomes excessive, and not so poor that it requires extensive work.

Most real estate search results prioritise attractive properties over fixer-uppers. As a result, you may need to seek outside the most common search strategies. Along with the internet, consider traditional networking and drive-bys.

By networking within the sector, you can learn about properties that have not yet been offered for sale. The more people who understand what you’re searching for within your investing network, the more eyes and ears you’ll have on the ground. This group comprises real estate brokers and property managers, as well as private lenders and even other investors.

Driving through leisurely but strategically located neighbourhoods can also go a long way. Fill up the gas tank, choose the neighbourhoods in which you wish to invest, and take the road. Homes that exhibit indications of suffering or neglect are frequently the finest buys. Consider piled-up newspapers, lawn garbage, and an exterior in need of TLC.

What kind of property?

Your choice of property will be determined by your budget, your objectives, the market, and your intended use of the property. There are a number of advantages and disadvantages to investing in single-family homes and condominiums.

Purchasing apartments rather than single-family homes may force you to contend with uncertain condo fees and a more difficult search for financing that must match particular criteria. For example, traditional lenders require that at least 50% of total units in a development be inhabited by purchasers of primary residences or second homes.

For beginners, the greatest investment property is typically a single-family residence or an apartment. Apartments require little maintenance because the building association handles outside repairs, allowing you to deal with the interior. Apartments, on the other hand, often command lower rentals and appreciate at a slower rate than units.

Single-family houses and subdivision lots typically attract renters for a longer period of time. Families or couples are occasionally seen to be better tenants than single persons, as there is an assumption that families are financially secure and pay their rent on time.

However, there are some advantages to investing in apartments rather than units. Apart from being more inexpensive, condos are typically located in trendy, desired neighbourhoods where a scarcity of available land limits the availability of single-family homes.


Banks’ financing criteria for investment properties are more stringent than for permanent residences. They reason that when times are rough, people are less likely to risk their houses than they are to jeopardise a commercial property. Prepare to pay a down payment of at least 30% to 40% of the purchase price, including closing charges. Have the property inspected completely by a professional and have everything reviewed by a real estate lawyer prior to signing.

Don’t forget to purchase adequate insurance. Renter’s insurance covers the tenant’s personal items, but the landlord is responsible for the structure, therefore insurance may be more expensive than for a comparable owner-occupied home. Mortgage interest, insurance, and depreciation on the property are all tax deductible to a certain extent.

Keep in mind that while selecting a rental property, it’s critical to look for one that provides a positive return and matches your investment objectives, such as capital gain or yield. Where you purchase will have a significant role in this. If you’re interested in learning more about how to expand your real estate empire and make your mortgage work for you, contact our professional broker today.