How Banks Decide If You Can Afford an Investment Property
Investing in property is a classic Kiwi goal—build a portfolio, earn rental income, and set yourself up for a stronger retirement. But whether you’re eyeing your first investment or looking to expand, you’ll need to pass one major gatekeeper: the bank.
So how do banks actually decide if you can afford to take on another mortgage? Let’s break it down.
Why Banks Use a Conservative Approach
All banks must follow the Responsible Lending Code, which means they assess your application based not just on today’s numbers, but on how your finances would hold up under pressure—rising interest rates, vacant rental periods, or unexpected costs. While this approach can seem overly cautious, it’s designed to prevent borrowers from getting in over their heads.
The Key Factors Banks Use to Assess Affordability
When you apply for a mortgage on an investment property, banks will “stress test” your financials. That includes:
Using a higher interest rate (around 7–7.5%) to assess affordability—far above current rates.
Reducing the mortgage term for investment properties (often to 25 years, rather than 30).
Scaling back rental income, using only 65–75% of expected rent to allow for vacancies and costs.
Assuming your credit cards and overdrafts are maxed out, regardless of your payment history. Banks factor in 3% of the total credit limit as a monthly expense.
💡 Example: If your credit card limit is $20,000, the bank adds $600/month in assumed expenses—even if you pay it off in full each month.
How to Improve Your Chances of Approval
Here are practical ways to make your application stronger:
Reduce or cancel credit cards and overdrafts. Lowering your limits cuts back the “assumed” expenses in your application.
Pay off short-term debt like laybys and hire purchases.
Check that your current rents are up to date with the market—especially if you haven’t increased rent in a while.
Ask for a raise. Even a small pay increase can have a big impact. A $2.50/hour raise = ~$5,000/year = ~$50,000 more borrowing capacity.
Pay down your existing mortgage, especially on your home. This improves your equity and frees up borrowing power.
Look for positive cashflow properties, where rental income exceeds mortgage and running costs.
Find add-value properties, where renovations could boost capital value and rent.
Don’t shop for your dream home—invest based on numbers, not emotion.
Real-Life Example
Let’s look at a couple earning a combined $150,000 per year.
They:
Own their own home and one investment property
Receive $25,000 in rent from the investment
Owe $1 million on a mortgage (30-year term), paying ~$47,000 per year
Have two credit cards and an overdraft totalling $50,000 in available credit (but they pay off their cards monthly)
They believe they can afford a second investment property with a $500,000 mortgage. But when the bank reviews the application, it:
Assumes a 7.5% interest rate
Calculates mortgage over 25 years
Scales rental income down to 75%
Treats the $50,000 of credit as $1,500/month in ongoing expenses
Result? The bank says no—even though the couple has good financial habits.
But by:
Reducing their credit card limits
Increasing rent on the current investment property
Requesting a raise
Finding a bank that offers 30-year terms on investment lending
...they could shift the outcome to a yes.
Summary
As your property portfolio grows, equity becomes less of a hurdle—but your income and liabilities become the real constraints. The most effective strategies are to:
Increase your income
Minimise your debts and credit limits
Choose properties with strong cashflow or add-value potential
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