Did you know, many property investors use the equity in their existing property to buy another one?

Equity is calculated by the difference between the market value of your property and the remaining home loan amount against the property. For example, if the market value of your house is $900,000 and your current amount owing on your home loan is $400,000, then your equity is $500,000.

Using equity in your existing property may allow you to buy your next property with a hundred percent borrowing, which means no cash deposit will be needed when applying for a home loan. Many New Zealand property investors leverage their equity to purchase more and more investment properties, building up their wealth over the long term.

Some investors go to their current bank to apply for a home loan for their next property. This means using the equity to get pre-approval and that their properties will be cross-secured – it is not always the best thing because if someday, the approval amount may be less than what they expected, then they may be vulnerable to borrowing capacity glass ceilings. But there is a better way.

Using equity to buy an investment property with no deposit NZ

Video Timeline

1. Using equity from one house to buy another: having equity doesn’t mean you can borrow more - 00:15

2. Using equity to buy another house: what you should be aware when you have multiple properties secured with one bank? - 01:50

1. Using equity from one house to buy another: having equity doesn’t mean you can borrow more

Here is a real-world example: Daniel and Katherine have owned two properties in total, one family home and one rental. These two properties were secured with the same bank. This time, they went to their bank again and asked for a pre-approval for another rental property. Unfortunately, the approval amount they got from their bank was much less than they expected.

As not all lenders are equal, the borrowing capacity can widely vary from one lender to another simply due to different servicing calculation policies, and the gap is getting bigger and bigger. You need to have enough income to satisfy the requirements of your bank, otherwise they won’t approve your application. Daniel and Katherine in the example have good equity in their properties, but their bank couldn’t lend them enough amount whereas other banks can lend them much more ($50k more) based on the same income.  

How to increase your borrowing for another house when you have equity?

The trick is, if you plan to use equity from one house to buy another, make sure you have enough equity in your existing properties, and most importantly, the property is secured with the bank that their service calculation policies allow you to borrow more based on your income, then it can increase your borrowing for another property.

In order to use the equity that Daniel and Katherine (in the above example) have to buy another rental property, they need to firstly refinance one of the properties that have equity to another bank who can lend them more, because their current bank couldn’t do so.  Secondly, they need to wait for the refinancing completed, then apply for another pre-approval from their new bank. However, the whole process of the two application could take more than a month. Plus, refinancing your mortgage to another bank is not always guaranteed.  

2. Using equity to buy another house: what you should be aware when you have multiple properties secured with one bank?

If you are thinking about using the equity as the deposit to purchase another property, and all of your properties are secured with the same bank, but that bank won’t allow you to borrow more now, you have to refinance the property with equity firstly and then apply for a home loan from your new bank, as we explained in this example.

Now you may be wondering why you couldn’t apply for a pre-approval from your new bank for the next rental property while at the same time refinancing one of their existing properties to the new bank? Here are two reasons of not doing so:

Firstly, in this case, Daniel and Katherine only dealt with one bank. When you have multiple properties secured with the same bank and you want to refinance just one of the properties (this is called "partial discharge"), your bank will treat your loan application as a new one, by reassessing your remaining security value to make sure the remaining loan balance is within their LVR range, and more importantly, testing your serviceability to check if you can afford to repay the loan.

When you apply for a partial discharge, the bank normally asks you for a copy of the pre-approval from the new bank, and then they will consider if they can release that property based on your total lending. Say you are approved for a million dollar to buy a new rental property, subject to your refinancing of $500K. If you don't finish the refinance first, and you get a $1.5 million approval subject to refinancing, then once your current bank finds that offer and they see that $1.5 million, they may not approve the discharge. Because in your current bank’s eyes, you may not be able to afford additional one million on top of your existing loan balance. Consequently, they may decline you or ask you to take more loan with you. In some worst-case scenarios, if you already unconditionally purchased the property and it's within that pre-approval range, but your current bank won't release your property therefore you can't meet the condition of refinancing and your property can’t be settled, causing the issues such as penalty, interest payment, et cetera. That could be a disaster.

So the recommended approach is, if you plan to use equity to purchase another house but you have multiple properties secured within one bank, it’s best to get in touch with your mortgage broker to review your current loan structure and see if you need to do restructure first, that way when you are ready to purchase another property, you can go straight into pre-approval stage.

Secondly, even though you’ve separated your properties among different banks, which means you won’t face partial discharge when refinancing, we would still suggest you still have your loan structure checked and see if you need to refinance, and if so, probably it’s better to complete the refinancing first. This is because: if you’re getting the pre-approval for your next rental plus refinancing, the entire $1.5 million of lending will be treated as new money. Then a different lending rule will apply for the new money – the bank will use the test rates (higher than actual rates) to assess your application, which means you may potentially borrow less if you’re not doing refinancing first.

Remember, as a rule of thumb, if you’re thinking about borrowing more for next property, your current bank may not approve you enough lending, it's best to consult an experienced mortgage adviser to review your current situation first and take action early to avoid delay on getting pre-approval for purchasing new property.

Prosperity Finance – home loan help

If you plan to buy an investment property, using your existing equity could be a great way to get your foot in the door. Make sure you have a clear understanding of your financial situation. We’re happy to review your current loan structure and to see if you can use your equity to buy another house,  Call us at 09 930 8999 or email: support@profin.co.nz for a no obligation chat with our mortgage brokers.   

More Articles:

Loan to value ratio (LVR) restrictions for investment property return to 70%

Do you have multiple properties secured with the same bank?

Should I still refinance my mortgage even if my current rates are good?

What are the commonly accepted deposit sources for buying a house in New Zealand?

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.