Should investors choose a fixed or floating interest rate?

When you get a mortgage you will usually choose between a fixed and floating interest rate.

If you plan to keep your investment property for years, fixing your rate can make it easier to plan your costs.

You’ll know how much interest you’ll pay while your rate is fixed.

But think about your future plans too.

For example, if you plan to sell an investment property soon, you might not want to fix your entire mortgage for a long time. 

That could make it harder or more expensive to pay back the mortgage once you sell.

Some investors fix parts of their mortgage for different lengths of time; others leave part of it on a floating rate.

It depends on how much you can afford and what you plan to do next.

Where can you get a mortgage in New Zealand?

There are two main types of lenders: banks and non-bank lenders.

Some of New Zealand’s main banks include ANZ, ASB, BNZ, Kiwibank and Westpac. There are also smaller banks.

Some of NZ’s non-bank lenders include Basecorp Finance, Avanti Finance, Liberty Financial and Pepper Money.

You can approach lenders yourself or use a mortgage adviser.

Should you use a mortgage adviser?

A mortgage adviser helps you find a bank and apply for a mortgage.

They can compare interest rates, explain what different banks look for, and help you set up your mortgage.

This can be especially useful for property investors.

That’s because the bank offering the lowest interest rate isn’t necessarily the bank that will lend you the most money.

For example, one bank might count more of your rental income than another.

One bank might also lend you more than another if you already own several properties.

An adviser can help you understand those differences before you apply.

Banks often pay mortgage advisers for bringing them customers. However, some advisers do charge fees, so it’s worth asking upfront.

What does a mortgage application look like?

When you apply for a mortgage the bank will ask for information about you, your finances and the property you want to buy.

The application process changes depending on which bank or mortgage broker you use … but they all pretty much want the same information. 

For example, at Opes Mortgages our team uses an online tool called Trail. It takes you through each step of the application and gives you one place to upload all the documents you need.

Here’s what you’ll usually need to provide:

You will usually need to show your payslips, bank statements and how much you already owe.

What changes when you apply for another investment mortgage?

If you already own a property, the process is similar.

But there are a few extra things the bank will consider.

You can learn more about using an existing property to fund your next purchase in our usable equity guide.

Why might your mortgage application be declined?

There are at least five common reasons banks decline mortgage applications.

We have already covered the first three.

Let’s look at 4 and 5. 

Poor account conduct

When a bank lends you money it wants to know you will make your repayments on time.

That’s why it looks at how you’ve managed your accounts.

For example, the bank might be concerned if:

• Your automatic payments regularly bounce because you don’t have enough money.
• Your account frequently goes into an unarranged overdraft.
• Your credit cards go over their limits.

These can suggest you might struggle to make mortgage repayments.

But a declined application doesn’t necessarily mean you can never get a mortgage.

You may need to spend time improving how you manage your accounts before applying again.

A mortgage adviser can help you work out what needs to change.

Poor credit history

Banks also check your credit history.

This shows how you’ve managed debt in the past.

For example, if you haven’t paid a bill and it’s been sent to a debt collector, the bank might be concerned.

But having a poor credit history doesn’t automatically mean your mortgage application will be declined.

Check your credit report before applying, especially if you’ve missed payments in the past.

That gives you time to correct any mistakes and explain any problems to your lender.

How should property investors manage their mortgage?

Not every investor wants to pay off their mortgage as quickly as possible.

Some want to pay off their mortgage faster. Others want to pay less each week or save money to buy another property.

Here are five ways investors can manage their mortgages, depending on their goals.

#1 – Consider an interest-only mortgage

With an interest-only mortgage you pay the interest but don’t reduce the loan balance during the interest-only period.

That means your mortgage repayment is lower each week.

For example, on a $500,000 mortgage at 5% interest:

That’s $138 a week you could put towards property expenses or another investment.

But there is a trade-off.

Your mortgage balance doesn’t decrease during the interest-only period.

And when that period ends, your repayments will usually increase because you need to start paying off the loan.

The bank needs to agree to an interest-only mortgage, and it often won’t let you keep it forever.

You can compare the repayments using our interest-only mortgage calculator.

#2 – Use an offset account

An offset account links your savings to your mortgage, so you pay less interest.

For example:

At 5% interest that’s a saving of $1,500 a year, assuming your savings stay in the account.

You can still use your savings when you need them, although each bank has different rules and fees.

#3 – Use revolving credit

Revolving credit works like a large overdraft.

You can pay money into the account to reduce your debt, then withdraw it again when needed.

You only pay interest on the amount you have borrowed.

This means you can use the money when you need it, such as when a tenant moves out or something needs fixing.

But if you keep withdrawing money, your debt won’t decrease. And often revolving credits and offset accounts come with higher interest rates. 

So you only save money if you have money parked in the account.

#4 – Make extra mortgage repayments

Paying a little extra each week can make a big difference over time.

For example, on a $400,000 mortgage at 5% interest over 30 years:

That’s around $95,000 less in interest.

#5 – Use equity to buy another property

Instead of paying off their mortgage faster, some investors use the value they’ve built up in one property to help buy another.

This means borrowing more money now, hoping to earn rent and make money if property prices go up.

They could then use that money to help pay off their mortgages.

But property prices don’t always go up. And the bank still needs to agree to lend you the money.

Which option you choose depends on what you want to do next. Do you want to pay off your mortgage, spend less each week, or buy another property?

What’s the next step to getting an investment property mortgage?

Your mortgage is one of the biggest financial decisions you will make as a property investor.

And it’s not just about getting approved.

The bank you choose, your interest rate and how you pay back your mortgage can all change how much the property costs you each week.

They can also affect how much you can borrow in the future.

That’s why getting the right mortgage matters just as much as getting the mortgage approved.

Before you commit to a loan, talk to a mortgage adviser who understands property investment.

They can help you compare banks, work out how much you can borrow and choose how to pay back your mortgage.

Ready to take the next step? Talk to an Opes Mortgages adviser and find out what your options are.