Finance & ownership basics

Most property purchases in New Zealand are part-funded by a bank. You put in a deposit, the bank lends the rest, and the property itself is the security. The single most important number in that conversation is your LVR - the Loan-to-Value Ratio. It's simply how much you're borrowing as a percentage of the property's value.

If a place is worth $600,000 and you borrow $480,000, that's an 80% LVR. The other 20% ($120,000) is your deposit. A lower LVR means you own more of the property outright, you borrow less, and the bank sees you as lower risk.

Two other terms you'll meet: serviceability (can you afford the repayments, usually tested at a higher 'stress-test' interest rate than the one you're offered) and equity (the share of the property you actually own - value minus what you owe). As you pay down the loan or the property rises in value, your equity grows, and that equity can later become the deposit for your next purchase.

When a bank decides how much you can borrow, it doesn't use today's interest rate. It uses a higher test rate (also called a servicing or stress-test rate) — typically a couple of percent above the advertised rate — to check you could still cope if rates rose. So you might be paying 6% but be assessed as if you're paying 8–9%.

Serviceability is the test: after your living costs, existing debts and the property's outgoings, is there still enough income (including a portion of the rent) to cover the loan at the test rate? If yes, the loan is 'serviceable'. If the deal only works at today's low rate, the bank — rightly — sees that as fragile.

A principal-and-interest (P&I) loan pays down the debt as well as the interest — every payment, you owe a little less. An interest-only (IO) loan pays only the interest for a set period, so the balance doesn't fall, but your payments are lower and cashflow is easier.

Investors often use IO to keep a portfolio cashflow-positive while values and rents grow, then switch to P&I later. The trade-off: you're not building equity through repayments, lenders cap the IO period (often a few years at a time), and when it ends your payments jump — because the original loan term is now shorter. An IO period on a 30-year loan can mean repaying the principal over the remaining years at a higher monthly cost.

New Zealand banks lend under responsible lending rules — they have to reasonably satisfy themselves you can repay without hardship. In practice that means checking the purpose of the loan (and anti-money-laundering ID), your account conduct (bank statements are scanned for hidden debts, heavy spending or gambling), a registered valuation (the bank usually picks the valuer), and serviceability at the test rate.

On top of that sit two RBNZ tools. LVR (loan-to-value ratio) limits how much you can borrow against a property: owner-occupiers generally need around a 20% deposit and investors around a 30% deposit, with new builds often exempt. DTI (debt-to-income) limits total borrowing to a multiple of income — broadly up to about 6× for owner-occupiers and 7× for investors, with banks allowed a small share of lending above those caps.

When you own a property to earn income (rent), the costs of running it - rates, insurance, repairs, property management, and importantly the interest on the loan - can usually be offset against that rental income for tax. Lowering your taxable income is one reason investors care so much about how a deal is financed.

'Deductibility' just means a cost is allowed to be subtracted from income before tax is worked out. Interest is often the single biggest expense on a leveraged property, so whether (and how much of) it is deductible has a real impact on your cashflow.

A few principles that tend to hold regardless of the dial settings:

- Only the interest portion of a mortgage payment is potentially deductible - never the principal (the bit that pays down the loan itself). - The expense must relate to income-earning use. The mortgage on your own home isn't deductible because it isn't producing taxable rent. - Commercial property has generally been treated differently from residential, and has typically allowed interest deductibility - more on that in the final module.

Keep clean records, separate your investment banking from personal spending, and let your accountant do the heavy lifting at year end.

You don't have to own an investment property in your own name. The 'wrapper' you buy through affects tax, asset protection, who can be on the loan, and how easily you can bring in partners or pass assets on. There's no single 'best' structure - it depends on your goals, your other assets, and your family situation.

The common options in New Zealand:

- Personal name(s): simplest and cheapest. You and/or your partner are on the title and the loan. Income and losses flow straight onto your personal tax. Fine for many first-time investors. - Look-Through Company (LTC): a special company type where profits and losses 'look through' to the shareholders' personal tax, while still giving you a company structure. Popular with investors who want some separation without losing the personal tax treatment. - Trust: a separate legal arrangement where trustees hold the property for beneficiaries. Often used for asset protection and estate planning. More complex and more costly to set up and run. - Ordinary (standard) company: less common for buy-and-hold rentals, but used in some situations, particularly commercial.

Whatever you choose, the bank still needs to be comfortable lending to that entity, and you'll usually have to personally guarantee the loan anyway. So a structure changes the tax and protection picture - it rarely lets you escape responsibility for the debt.

Borrowing for a commercial property - a shop, office, warehouse or industrial unit - works on a noticeably different set of rules from a home loan. If you've only ever bought residential, the commercial conversation can feel like a different sport.

The main differences:

- Bigger deposits. Commercial lending typically wants a lower LVR - often around a 30-50% deposit rather than 20%. The bank is lending against the income the building produces as much as the bricks. - Shorter loan terms. Where a home loan runs 25-30 years, commercial loans are often structured over shorter terms and may need refinancing or review sooner. - The tenant and lease matter enormously. Lenders look hard at the strength of the tenant and the length of the lease (the WALE - weighted average lease expiry). A long lease to a strong tenant can unlock better terms; a vacant building is far harder to fund. - Interest deductibility has generally applied to commercial property, unlike the on-again-off-again residential story - though, as always, confirm current rules.