March 21, 2025

How to Use Your Home’s Equity For Buying a Rental Property

Property ownership in New Zealand provides a powerful opportunity for wealth and generating long-term financial security. One popular strategy is to convert the built-up equity in your existing home into a springboard for purchasing a rental property. This approach can help you either diversify an investment portfolio or secure extra income upon retirement. Below is a clear outline of how equity works, the ways to access it, and steps to consider when allocating it toward an investment property.

Understanding Equity

Equity represents the portion of your home that you own outright, calculated by subtracting any outstanding mortgage from the property’s current market value. 

Here is a simplified example:

• Original purchase price: NZD 500,000
• Initial deposit: NZD 100,000 (mortgage of NZD 400,000)
• Several years later, property value: NZD 700,000
• Mortgage balance now: NZD 350,000

Subtracting the outstanding mortgage from the current value ($700,000 minus $350,000) reveals NZD $350,000 in equity. Before moving forward, Loan to Value Ratio (LVR) restrictions from the Reserve Bank of New Zealand still apply, so the amount of equity that can be used will depend on lending rules and your personal financial position.

Ways Equity Grows Over Time

1. Regular Mortgage Repayments
   Consistent repayments steadily lower your mortgage balance, which increases equity.
2. Value Appreciation
   Property in many regions has grown in value, so an increase in your home’s market price translates directly into more equity.
3. Renovations or Upgrades
   Home improvements can raise your property’s appeal and market value, enhancing equity.

Accessing Equity

A variety of methods can unlock equity in a home:

1. Refinancing or Topping Up
   An existing mortgage can be topped up to use a portion of equity for a new purchase. This often involves reviewing loan terms or switching lenders for a better deal.
2. Supplementary Home Loan (Equity Loan)
   A separate loan can be taken out, secured by the equity you have available.
3. Revolving Credit or Offset Facilities
   Arrangements such as revolving credit lets you access available funds for deposits or renovations, offering flexibility for your investment plans.

Because lenders have individual policies, it is useful to speak with a mortgage adviser for precise calculations, guidance on structuring loans, and an overview of lender-specific conditions.

Moving Ahead with an Investment Property

Purchasing a rental property typically involves a deposit and a loan to cover the balance. The deposit often comes from the equity released from your current home. Once the mortgage for the rental property is in place, the rental income helps to support repayments. Growth in your new property’s value may also bolster wealth.

Important Considerations

• Affordability
  Holding two properties brings extra costs, such as insurance, maintenance, council rates, and potential periods without tenants. Ensuring adequate cash flow is a priority.
• Tax Implications
  Interest deductibility rules, bright-line test regulations, and property tax policies evolve over time. Speaking with a tax specialist helps keep things straightforward.
• LVR Restrictions
  Owner-occupied homes are typically permitted a higher LVR compared to investment properties. Checking the current guidelines is crucial for accurate deposit requirements.
• Future Market Fluctuations
  Property values tend to move up in the long term, but interim fluctuations can affect budgets. Periodic reviews of mortgage structures are often recommended to keep everything on track.

Capital Advice Is Here to Help

Capital Advice has assisted clients in Wellington and all of New Zealand for decades, guiding them through every step of leveraging home equity to secure an investment property. We organise pre-approvals, advise on selecting the right loan structure, and liaise with legal professionals to ensure a smooth experience.

Reach out to us at (04) 495 5903 or info@capitaladvice.co.nz to discuss your plans. Our team looks after your interests, continuing the relationship beyond the initial purchase and throughout the life of your loans. Making equity work for you is straightforward with a trusted mortgage and insurance advisor at your side.

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