Although banks are tightening access to credit and becoming harder to deal with, there are competitive non-bank options with rates as low as 3.40% that are worth considering. The non-bank market is growing and it’s increasingly competitive. The rates might be slightly higher than banks, but the additional cost is inconsequential if properties are cash flow positive and values continue to grow at more than 3% per year.

In a previous article I wrote on the next housing boom I was forecasting a 50 percent increase over the next ten years to an average house price of one million dollars across New Zealand. That’s a modest increase by historic standards, but understandable given the context of very low interest rates.

An 80% geared property with its value growing at 3% per year, a 4% gross rent yield and funded at a mortgage rate of 3.40% will produce a pre-tax return on capital of 19% per year. Even with a mortgage rate of 4.50%, the cash flow dries up, but the pre-tax return on capital is 14% per year.

That’s the power of leverage. So, if house prices increase by 50% over the next ten years, how much capital are you leaving unutilised? How much largely tax-free profit are you leaving on the table?

‘We have non-bank options that will test servicing ability at an interest rate of 5.80% - which is a whole 1% below banks’

This is where thinking about your portfolio and how you split your lending becomes important. The best strategy is to free up as much equity as possible by borrowing up to the maximum with banks, then to move surplus equity over to properties that can be funded by non-banks.

We have non-bank options that will test servicing ability at an interest rate of 5.80% - which is a whole 1% below banks. They’ll also test servicing of existing loans held with other lenders based on the rates on those loans, not the servicing rate. This can materially increase your borrowing power beyond what banks say is possible.

Have A Plan

Successfully doing this relies on having a plan and methodically executing it. The order you go about it is important and it can take time and effort to get lending in the right places. Every bank has different rules on apartments, rent-by-the-room, and multi-unit properties. This is important when moving equity around.

This equally applies if you own your own home and are thinking about how to leverage your equity into an investment property. Borrow up to the maximum with your home and then buy a rental with a 20% deposit through one of our non-banks.

Non-banks will typically lend 20% more than a bank and more to investors with multiple properties. Just another reason to use a broker and talk to Squirrel.