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Creating Wealth Through Property

Done properly, property investment is an excellent method of creating wealth as part of a long-term investment strategy.

Historically, house prices provide a steady return to investors in the form of capital growth as property prices rise, while rent provides passive income. With the right investment strategy in place, smart property investment can be an ideal wealth-creation vehicle.

One of the best benefits of residential real estate is the ability to borrow to fund the investment, which in this context is also known as leverage. Leverage amplifies returns, but it can also amplify losses. Adopting a professional approach to your investment property lending is crucial to minimise risks, and maximise potential returns.

Your Real Estate Loans

Investment loans vary greatly depending on your circumstances and what you’re looking to achieve. They can be very simple (such as your standard home loan), or something more complex to help you make the most of changing tax regulations, appropriate gearing ratios, and balancing repayment of debt with your passive income needs.

To help manage your property investment loans, you can also make good use of a range of loan features that vary by lender, such as redraw, interest only, offset, and additional lump sum repayments. Smart use of such features can significantly increase both your flexibility and return on investment (ROI).

Separating Your Property Investment Portfolio

Separating properties by using different lenders to fund different investment properties can keep you flexible as the lending market evolves, so you can consistently secure the best possible lending terms and liquidate a property if needed. In some ways, this allows you to play the banks off against each other, to ensure you're always getting a deal that suits your property investment aspirations.

This approach can also avoid the need to endure a portfolio review.

Portfolio Review

If your lender has a mortgage over more than one property securing its loans, and you sell one property, the lender may require a full review of your portfolio. The review will be based on the lender's prevailing criteria. If the lender’s credit criteria are more stringent at this time than when you first secured the loans, then the lender is likely to demand a greater repayment from the sale proceeds than it may have required under the original criteria. This situation can be both unexpected and cause a great deal of stress, which might have been avoidable.

New Zealand Non-bank Lenders and Your Real Estate

First-tier lenders are banks such as ANZ, BNZ, Westpac, ASB, and so-on. For the most part, loans from these banks are very similar, although their mortgage pricing and terms do fluctuate. Typically, these banks will closely align their interest rates with the rate set by the Reserve Bank of New Zealand.

Second Tier Lenders

Non-bank lenders are often called second-tier lenders. They include lenders who are in the business providing finance but aren’t the traditional registered banks, like those mentioned above. Non-bank lenders include building societies and credit unions. Especially for property investors, second-tier lenders can offer loans to help buyers secure a mortgage with a lower deposit. The main difference between first and second tier lenders is the acceptable deposit for a property loan. Banks typically expect a 40% deposit for an investment property, while non-bank lenders can require as low as a 10% deposit. This can dramatically change matters for a property investor.

The non-bank, second-tier lenders also have more flexibility when encountering situations such as the self-employed or even those with an adverse credit history. This makes the property market much more accessible to investment.