Using Rental Income in Your Mortgage Application
If you own a rental property or are planning to purchase one, the income it generates can play a meaningful role in your mortgage application. However, lenders in New Zealand do not simply take the full rental amount at face value. They apply their own assessment methods to account for vacancy periods, maintenance costs, and the risk of income interruption, which means the figure they use may differ from what actually lands in your bank account each week. Understanding how this works before you apply helps you plan more accurately.
How Lenders Assess Rental Income
The most common approach lenders take is called shading, where they count only a proportion of the gross rental income rather than the full amount. A figure of around 75 to 80 percent is common across many lenders, though this varies. The idea is that the remaining percentage covers periods when the property might be vacant, maintenance and repairs, and property management fees if applicable.
Some lenders take a different approach and assess the net rental income after deducting actual expenses, using information from your tax return. This method can sometimes result in a higher or lower figure depending on how your rental expenses are structured. Your accountant and a mortgage adviser can help you understand which approach is likely to produce the more favourable outcome for your application.
Existing Rental Properties Versus New Purchases
The way lenders treat rental income differs depending on whether you are presenting income from a property you already own or projecting income from a property you are about to buy. For an existing rental, lenders will generally want to see evidence of the income, such as a tenancy agreement, recent bank statements showing rent received, or tax returns that include the rental income schedule.
For a new purchase, lenders may accept a registered property valuer's assessment of market rent for the property, or a letter from a property manager outlining expected rental rates in the area. Some lenders will still apply conservative shading to projected income, so it is worth understanding that the full market rent figure may not be the number a lender ultimately uses in your serviceability calculation.
The Interest Deductibility Context
In recent years, interest deductibility rules for residential rental properties in New Zealand have changed, which has affected the net income many landlords report to Inland Revenue. As rules around what can be deducted have evolved, the income picture presented in tax returns may look different to how it appeared in earlier years. It is worth being aware that lenders reviewing your tax returns will see the impact of these changes and may ask questions about your rental income history.
Boarders and Flatmates
Income from taking in boarders or flatmates in your owner-occupied home is treated differently from formal rental income. Some lenders will accept a portion of boarding income as supplementary income, though the amount they count is generally conservative. If you rely on boarding income as part of your application, it is worth checking with a mortgage adviser early in the process about how a specific lender will treat it, as policies vary considerably.
- Most lenders shade rental income to around 75 to 80 percent of the gross amount
- Existing rental income needs to be evidenced by tenancy agreements or bank statements
- Projected rental income on a new purchase may use a registered valuer's market rent assessment
- Changes to interest deductibility rules affect the net income shown on tax returns
- Boarding income is generally assessed more conservatively than formal tenancy income
Rental income is a legitimate and often valuable part of a mortgage application, but the details matter. At Chaperone, we can help you understand how your specific rental situation is likely to be viewed across different lenders, so you can put together the strongest possible picture of your overall financial position.