Can You Buy an Investment Property With $0 Cash?
Buying an investment property without using a cash deposit may be more achievable than it first appears.
For some homeowners, the opportunity is already sitting in the equity they have built up in their current home. That equity may be able to support the deposit on an investment property, which means you do not necessarily need to save the full deposit in cash before you start planning.
It still needs to work on paper. The bank will look at your income, existing debt, expected rent and the total repayments. But if property investment is something you want to work towards, understanding your usable equity is a useful place to start.
So, the first thing to understand is that equity is the difference between what your property is worth and what you owe on it. For example, imagine your home is worth $800,000 and your mortgage balance is $400,000. On paper, you have $400,000 in equity. That does not mean the full $400,000 is available to use. The bank will usually want part of the property’s value to remain as security. What is left after allowing for that may be considered usable equity.
That usable equity could support the deposit on an investment property and, depending on how the lending is structured, may also help cover some of the purchase costs. This is generally what people mean when they talk about buying an investment property with “$0 cash”. You are still borrowing the money, but you may not need to provide the deposit from your savings.
What about the deposit before settlement?
You will usually still need to pay a deposit under the sale and purchase agreement, which is often around 10% of the purchase price. The amount and timing can be negotiated as part of the agreement, and it may be payable when the agreement is signed or when it becomes unconditional.
For a $500,000 investment property, a 10% purchase deposit would be $50,000.
That $50,000 is not an extra cost on top of the purchase price. It forms part of the total amount you are paying for the property. If you are buying without using cash savings, that deposit may need to be funded through a separate loan secured against your existing home.
For example:
Purchase price: $500,000
Purchase deposit paid earlier: $50,000
Balance paid on settlement day: $450,000
Equity is only one part of the approval
The next question is whether your income can support the additional borrowing.
The bank will look at your wages or other income, current mortgage, credit cards, personal loans, household expenses and the expected rent from the investment property. Rental income can help, but banks will not usually count every dollar. They may allow for things like rates, insurance, maintenance, property management and periods when the property is not tenanted. The amount of rent included in the assessment can also vary between lenders.
Banks generally test the proposed lending at a higher interest rate than the rate you may actually receive. This is to check whether the repayments would still be manageable if interest rates or other costs increased.
Residential lending is also affected by New Zealand’s loan-to-value and debt-to-income restrictions. These place limits on some higher-risk lending, while each bank still applies its own lending criteria to each application.
How we approach it at Taranaki Home Loans
We start by working out how much usable equity may be available. We then look at your income, existing debts, expected rent and how different banks are likely to assess the application.
The loan structure is also important. Where possible, we keep the lending clear so you can see which debt relates to your home and which relates to the investment property. We also work through the purchase deposit, likely repayments and the other costs that come with owning a rental. The aim is to give you a realistic view of what may be possible before you commit to a purchase.
Buying an investment property without using cash savings can be possible, as long as the equity, repayments, purchase deposit and loan structure all work together. For some Taranaki homeowners, the value already built up in their home may be enough to start planning their next property.
This article provides general information only. Lending criteria, bank policies and regulatory settings can change, and any lending decision will depend on your circumstances. Get legal advice before signing a sale and purchase agreement.