| Residential property investment is one of New Zealand's most popular wealth creation tools. It is important to receive the right financial advice when structuring your property investment loan. The correct structure of this home loan can save you thousands in interest and tax benefits, so utilising mortgage broking expertise in conjunction with professional accounting advice is key.
Many lenders provide loans for residential property investments at the same interest rates and fees as their ordinary home loans. Some lenders will even lend to 95 percent of the property value. But a few lenders have lower lending limits for investors, or will lend a lower proportion of the property value if you're buying an apartment, or a residential property outside the urban areas. This just reflects the higher risk lenders are taking.
One of the key differences between a loan for your own home and for an investment property is that the interest on a loan taken out for investment purposes is tax deductible. It doesn't matter whether the property used as security for the loan is your own home or one you rent out - it's the purpose of the loan that is important.
The larger the proportion of a property value you borrow, the larger the risk you face and potential returns you can earn. If you only have a little bit of equity (your own money in a property), then any increase in the property value will magnify the returns on that money. However, losses will be accelerated if values fall.
Apart from falling property values, other risks you need to consider are interest rate rises, long periods when you can't find a tenant, or if you lose other income you rely on to help support the loan.
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