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A rental property is the typical kiwi's first port of call. But investors often find the hassle of dealing with tenants, chasing up rental arrears, and constant repairs from damage to be a hassle. For these people, a bach that can be used at your leisure but still generate income could be a good option.
If you’ve owned your property for at least a couple of years, you will have seen some significant growth in the value of your home. So, what to do with the equity you’ve got sitting there? Purchase a rental property or buy a bach?
A rental property is the typical kiwi's first port of call. But investors often find the hassle of dealing with tenants, chasing up rental arrears, and constant repairs from damage to be a hassle. For these people, a bach that can be used at your leisure but still generate income could be a good option as part of your wealth creation.
So you want to buy a bach? The first stop should always be your bank to see how much you can afford.
The first thing a bank will look at is your deposit. Because you can use a bach personally, the bank will typically view it as an Owner-Occupied property. This means you may need a 20% deposit, unlike an investment property that usually requires a 40% deposit (except for new builds). In other words, your equity can buy more bach than it can investment property.
Yes, if you have useable equity in your home, you can borrow against this to buy a holiday home. Let’s look at an example in real numbers.
Example:
Your current home is valued at $1m Your mortgage is currently $600k (60% LVR)
You can borrow up to 80% on your own, meaning you can borrow up to $800k. In other words, you have $200k ($800k maximum borrowing minus $600k current mortgage) of useable equity.
You can then take that $200k and use that as the 20% deposit for a bach. The example above could therefore borrow $1m ($200k of useable equity and the remaining $800k against the bach) to buy their holiday home.
A deposit is a line in the sand - you either have enough or you don’t at all the banks. Income is a little trickier and ranges significantly from bank to bank. Unfortunately, even if you intend to rent out your bach, the bank can’t take this income into account as they don’t know how often it will be rented.
Of course, the income will actually help you pay down your mortgage (very quickly if you structure your mortgage correctly) but it can’t be factored into the mortgage affordability calculations.
So you’ll need to be able to afford the bach using your own income. What is important to realise is that there is quite a variation between the banks. We have seen up to $140k difference between the bank's calculators for the same property, so make sure you hunt around or talk to a mortgage adviser. It’s also not wise to rely on online calculators.
There are a lot of factors that affect your ability to get an income. Make sure you talk to all the banks or your adviser to really get an indication of what you can afford.
Banks really don’t mind them. They provide people with a diverse property portfolio with baches often being in a completely different part of the country to the main family home and banks know that they can provide some amazing income.
A bank or mortgage adviser can quickly tell you over the phone if you have enough useable equity. The next step after that is to calculate if you have enough income. This requires an application for pre-approval with a bank but will mean you have a letter of offer with the approved amount.
You aren’t locked into anything at this stage - it’s an offer, not a contract to purchase - so you are still free to make a decision on whether to proceed. But knowing how much you can afford (or knowing what you need to change to get what you need) is, by far, the most important step to purchasing your new bach.
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This article was produced by The Mortgage Lab and is not intended as personalised financial advice. To discuss your particular situation, talk to your local adviser. All numbers are meant as examples and not indicative of any property in particular. Talk to Bachcare for forecasts in your area.
