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    What borrowers need to know

    You probably already know that there are different types of home loans, with varying terms, conditions and interest rates. However, the most important distinction, the one factor that will determine the affordability of your mortgage, is how you intend to use the home loan. For some people, finding the perfect three-bedroom home to live in is a top priority. For others, it’s finding a sturdy investment property – with good bones – that they can rent.

    There are financial pros and cons to both options – especially for first-time homebuyers. Lending for residential investment property carries a higher risk compared with lending for owner-occupied properties, and banks are required to hold more capital for this type of lending. Like most things, it comes down to what suits your financial situation – and desired lifestyle – best.

    Here we look at each option and what it means for your home loan application:

    The difference: home loan versus investment loan

    There’s a world of difference between owner-occupied residences (buying a house for you and your family to live in) and investment properties (purchasing real estate you plan to rent to tenants or flip for a profit). When applying for a mortgage, you’ll need to specify whether you need an owner-occupied home loan or an investment loan. What you choose to do will determine the make-up of your mortgage.

    Application criteria are different

    When you apply for a mortgage to purchase an owner-occupied property, you’ll be required to supply a mix of the following information: your income and liabilities including existing debt and savings history. Lenders will evaluate these things against a set of criteria to determine whether you have the financial ability to service your intended loan.

    For investment loans, the requirements can be a little tighter, so a good savings history and accurate records of your financial affairs will be even more crucial. You’ll need to demonstrate you have money set aside to manage the mortgage – even if you plan to sell the property quickly. If you’re unable to cover the cost of your mortgage repayments with your income, lenders might consider potential rental income – although this won’t reduce your debt-to-income ratio (a key factor in the loan approval process).

    You might need to put forward a larger down payment, particularly if you already own and occupy a house. On top of all that, lenders may consider your property’s potential increase in value over time, as well as trends in the housing market.

    Your repayments may look different

    On investment loans some lenders offer interest-only repayments – which can significantly decrease how much you pay each fortnight or month. Interest-only repayments are rarely available when borrowing an owner-occupied home loan because of the risk involved. Lenders who offer interest-only repayments will generally do so for a pre-determined period – that’s why they’re most popular with investors who buy and flip properties quickly. At the end of this term, your home loan repayments revert to principal and interest.

    Tax obligations are different

    If you own an investment property that you rent to tenants, you can claim some of your property expenses on your tax return. Costs like house insurance, rates, repair and maintenance, property management fees, and any interest charges incurred from the purchase of the property can be deducted. If the costs incurred are to increase the property’s value, these cannot be deducted. If you sell your investment within five years of buying it, you may have to pay tax on any gains you make from the sale. This rule doesn’t apply when you’re selling your main home.

    However, keep in mind that rental payments are taxable. Also, when or if you decide to renovate and sell your investment property, you may be required to pay tax on the final sale amount.

    ‘Rentvesting’ for first-time homebuyers

    House prices have risen exponentially in recent years, making it more challenging for first-time homebuyers to enter the property market in their preferred suburb. Rather than buying a home to live in, one of the alternatives has been to purchase property as a ‘rentvestor’ – continuing to rent, but buying a house to renting out to others. For some, this can be a great way to get their foot on the property ladder – but do so with caution as there are some limitations. For example, you won’t be able to dip into your KiwiSaver to fund your deposit, as you can only withdraw KiwiSaver savings to buy a home to live in – not an investment property.

    Buy a home, flip an investment – always ask the experts

    How you choose to use your property will dictate the type of home loan you need. In general, property investors may need a larger deposit, and there’s more risk, but flipping a property quickly can pay big dividends when done well. If you’re looking to buy a house that you can make a home, the application process will be much less complicated, but what you can borrow all comes down to how savvy you’ve been with your finances. All lenders want to know is whether you can comfortably meet your mortgage repayments.

    To ensure you’re getting the right type of loan – and the best possible rates – for your financial situation, speak with the team at Global Finance today.

    **These are general guidelines and are by no means a reflection of bank or lending policies