WHAT’S THE BEST WAY TO STRUCTURE OUR MORTGAGES?

Rental property mortgage structure is one of the most important factors affecting the success of a property investment portfolio. Many investors spend weeks researching suburbs, property managers, and renovation budgets, but spend very little time reviewing how their lending is organised.

That can be an expensive mistake.

The right mortgage structure can improve cashflow, increase flexibility, reduce financial stress, and help you respond to changes in interest rates. The wrong structure can lock you into unnecessary repayments, limit future borrowing options, and create headaches when your circumstances change.

Whether you own one rental property or several, it pays to review your lending (and ownership) structure regularly. Interest rates change. Property values change. Tax rules change. Your mortgage strategy should change too.

30-SECOND SUMMARY

Key points:

• A well-designed rental property mortgage structure can improve cashflow and reduce risk.
• Many investors focus on property selection but overlook loan structure.
• Non-deductible home debt often deserves priority over deductible investment debt.
• Interest-only lending can improve short-term cashflow but is not always the right long-term solution.
• Splitting lending across different fixed-rate periods can reduce interest rate risk.
• Offset accounts and revolving credit facilities can improve flexibility.
• Investors should maintain a cash buffer for maintenance, vacancies, and unexpected events.
• Review your lending whenever you buy, sell, refinance, renovate, or experience a major life change.
• Professional tax and mortgage advice can help you avoid costly mistakes.

 

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WHY YOUR RENTAL PROPERTY MORTGAGE STRUCTURE MATTERS

A rental property succeeds or fails based on more than capital growth. What do we mean?

Cashflow matters.

Flexibility matters.

Risk management matters.

Many investors discover this when interest rates rise. A property that looked attractive on paper may suddenly require top-ups from personal income. Others find themselves unable to access equity because their borrowing has not been structured correctly.

A good mortgage structure helps you:

• manage periods of higher interest rates
• fund repairs and maintenance
• keep investment and personal debt separate
• improve flexibility when opportunities arise
• make informed decisions about future acquisitions

The goal is not to create the most complex structure possible. The goal is to create a structure that supports your long-term investment strategy while remaining simple enough to manage.

For guidance on lending and debt management, investors may also find resources from Sorted(opens in new tab) and the RBNZ(opens in new tab) useful.

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SHOULD YOU PAY OFF YOUR FAMILY HOME OR RENTAL PROPERTY FIRST?

Many property investors own both:

• a family home
• one or more rental properties

That raises an important question: Which debt should you focus on reducing first? In many situations, investors choose to prioritise reducing debt on the family home before reducing debt on a rental property. Why? Because debt on a family home is generally not tax-deductible.

By contrast, interest on qualifying rental property borrowing may be deductible depending on the circumstances and current tax legislation. Investors should consult current guidance from Inland Revenue regarding interest deductibility rules(opens in new tab).

This does not mean every investor should automatically leave rental debt untouched. Some investors prioritise reducing debt on heavily geared rentals because lower debt improves cashflow and reduces risk. Others focus on creating a balanced strategy that reduces debt across both property types.

The right answer depends on:

• income levels
• age
• risk tolerance
• portfolio size
• future investment goals

Avoid following generic advice without considering your own position.

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INTEREST-ONLY VS PRINCIPAL-AND-INTEREST LENDING

One of the most common discussions property investors have with banks involves interest-only lending. Under an interest-only arrangement, repayments cover interest but do not reduce the principal balance. This can create significantly better short-term cashflow. However, every advantage comes with trade-offs.

Advantages of interest-only lending

• Lower repayments.
• Improved cashflow.
• Greater flexibility.
• Additional funds available for maintenance or other investments.

Disadvantages of interest-only lending

• Loan balances do not reduce.
• Total interest paid can be much higher.
• Future lending restrictions may apply.
• Some investors become trapped in a cycle of refinancing.

Worked Example

Richard owns two Auckland rental properties. Higher interest rates have turned one property cashflow negative. He reviews his mortgage structure and negotiates a three-year interest-only period with the bank. His monthly repayments fall immediately. The property begins generating a modest surplus again. Richard uses the breathing room to improve rents gradually and complete deferred maintenance. The interest-only period helps him through a difficult period.

However, Richard recognises that the principal debt remains unchanged. He develops a longer-term strategy before the interest-only period expires.

Interest-only lending can be useful. It should not become a substitute for proper financial planning.

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SHOULD YOU SPLIT YOUR MORTGAGES INTO DIFFERENT FIXED TERMS?

Many investors place all lending on a single fixed rate. That approach works. But it is not the only option. Some investors divide lending into multiple portions with different fixed periods.

For example:

• one-third fixed for one year
• one-third fixed for two years
• one-third fixed for three years

This approach spreads interest-rate risk. No one knows exactly where rates will move next. Splitting lending avoids making a single all-or-nothing decision.

Benefits include:

• greater flexibility
• reduced refinancing risk
• staggered review dates
• potential access to different market opportunities

The downside is that administration becomes slightly more complex. For many long-term investors, however, the benefits outweigh the inconvenience.

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OFFSET ACCOUNTS AND REVOLVING CREDIT FACILITIES

Many investors overlook offset facilities and revolving-credit structures. These products can be extremely useful when used properly.

Offset accounts

Offset facilities link savings balances to a mortgage. The bank effectively calculates interest on the loan balance less the linked savings balance.

Revolving credit

A revolving-credit facility operates more like a giant overdraft:

• Income enters the account.
• Expenses leave the account.
• The balance fluctuates daily.

Both approaches can provide substantial flexibility.

Worked Example

Mary and John own their family home and one rental property. They hold approximately $40,000 in savings for emergencies and future maintenance. Instead of leaving those funds in a standard savings account, they place the money in an offset arrangement connected to their home loan. They continue to have access to the cash. However, the savings also reduce the amount of interest charged on part of their home loan. The result is improved efficiency without sacrificing liquidity.

Not every investor benefits from these products. Some people prefer simpler arrangements. Others find the flexibility extremely valuable.

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KEEP PERSONAL AND INVESTMENT DEBT SEPARATE

Property investors frequently create problems by mixing personal and investment borrowing.

Examples include:

• paying private expenses from investment facilities
• borrowing for multiple purposes under a single loan
• repeatedly transferring funds between accounts without maintaining adequate records

These actions can create accounting and tax complications. Good record keeping becomes especially important when investors refinance, restructure loans, or purchase additional properties. This is especially important when it comes to tax return time, as Inland Revenue require that each property’s income and expenses are reported separately. (You can offset loss from one rental property against income from another rental property, see this article for more info)

Clear separation produces several benefits:

• easier record keeping
• simpler accounting
• clearer cashflow analysis
• reduced administrative headaches

Before restructuring any lending, seek advice regarding both mortgage and tax implications.

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SHOULD PROPERTY INVESTORS MAINTAIN A CASH BUFFER?

Many investors focus on maximising returns. Fewer focus on resilience. A cash buffer can make the difference between a minor inconvenience and a major financial problem.

Unexpected costs arise regularly:

• rates increases
• insurance increases
• maintenance
• vacancies
• emergency repairs
• legal expenses

A water leak does not wait until a convenient time. Neither does a failed hot-water cylinder.

Worked Example

Sarah owns one rental property. The property usually performs well. However, the roof develops a leak and requires urgent repairs costing several thousand dollars. Because Sarah maintains a dedicated emergency fund, she repairs the issue immediately without relying on expensive credit facilities. The property remains tenanted and cashflow disruption stays manageable.

Reserves rarely feel important until the day they become essential.

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WHAT IF YOUR RENTAL PROPERTY BECOMES CASHFLOW NEGATIVE?

Many investors experience this at some stage.

A property that once generated surplus income can move into deficit because of:

• higher interest rates
• increased maintenance
• changing rent levels
• insurance increases
• higher council rates

Before making dramatic decisions, review the entire picture.

Possible responses include:

• reviewing rents
• refinancing
• extending loan terms
• switching part of the lending to interest-only
• reducing non-essential costs
• undertaking improvements that support higher rents
• selling a persistently underperforming asset

Each option carries advantages and disadvantages.  The best solution depends on your broader financial position and long-term goals.

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COMMON RENTAL PROPERTY MORTGAGE STRUCTURE MISTAKES

Focusing only on interest rates

Interest rates matter. Structure matters too. The cheapest rate does not automatically produce the best overall outcome.

Ignoring cashflow

Cashflow problems often appear before equity problems. Investors should stress-test their position regularly.

Failing to review lending

Many people review insurance annually. Far fewer review their mortgage structure annually.

Mixing personal and investment debt

This remains one of the most common mistakes.

Borrowing without a long-term strategy

Every loan should support broader investment objectives. If you cannot explain why a loan exists, the structure probably needs review.

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RENTAL PROPERTY MORTGAGE STRUCTURE CHECKLIST

Download and use this checklist during your next lending review. Mortgage structures that suited an investor several years ago may no longer suit their current cashflow, interest rates or plans for the portfolio. Our free Mortgage Structure Checklist gives you 12 practical points to review before you refix, refinance, acquire another property or change your lending.

Many investors complete this exercise annually. Doing so often identifies opportunities that would otherwise go unnoticed.

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FREQUENTLY ASKED QUESTIONS

Should rental property loans be interest-only?

Not necessarily. Interest-only lending improves short-term cashflow but can increase long-term borrowing costs. The right answer depends on your objectives and financial position.

Should I pay off my home loan before my rental property loan?

Many investors prioritise reducing non-deductible home debt first. However, circumstances differ and professional advice is often worthwhile.

What is an offset mortgage?

An offset mortgage links savings balances to mortgage debt. The arrangement reduces the amount of interest charged on part of the borrowing.

Can I claim mortgage interest as a tax deduction?

It depends on the purpose of the borrowing and current tax legislation. Check current guidance from Inland Revenue or seek professional advice.

Should all my mortgages be fixed for the same period?

Some investors choose that approach. Others spread lending across different terms to diversify interest-rate risk.

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SUMMARY

A strong rental property mortgage structure does more than reduce interest costs: It improves flexibility. It supports cashflow. It helps investors respond to changing market conditions.

The best structures generally keep personal and investment debt separate, maintain adequate cash reserves, and align lending decisions with longer-term investment goals.

Every investor’s situation differs. What works perfectly for one property owner may be inappropriate for another. If you have not reviewed your lending for several years, now may be a good time to revisit it. Small improvements can produce meaningful long-term results.

NEED HELP REVIEWING YOUR RENTAL PROPERTY MORTGAGE STRUCTURE?

A poorly structured mortgage can cost thousands of dollars in unnecessary interest, reduce flexibility, and create avoidable financial stress.

Whether you own one rental property or a larger portfolio, EpsomTax can help you review your lending structure, assess cashflow risks, and identify opportunities for improvement.

If you would like an independent review of your rental property mortgage structure, contact EpsomTax.com and speak with a property-focused accountant who understands the challenges faced by New Zealand property investors.