Refinancing your investment loan can be a smart financial move, offering the chance to secure lower interest rates and better terms. However, if you are considering refinancing, it’s crucial that you first assess the current equity in your investment property and understand the refinancing costs involved.

In the article below, our Investment Services team explains the benefits of refinancing your investment property loan, so if you do decide to consult a financial advisor or an independent mortgage broker, you are armed with the correct information.

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What You Need to Know About Investment Property Refinancing

Refinancing your investment loan can be a strategic move to access equity, secure a lower interest rate, reduce monthly payments, or alter loan terms to better meet your financial goals. The refinancing costs can include application fees, appraisal fees, and closing costs, so this is the perfect time to assess your existing lender and home loan.

Reasons to Refinance Your Investment Property Loan

“Refinancing can be an effective way to improve your investment property’s financial performance, increasing available funds and achieving long-term investment goals. In conjunction with maximising your returns on your investment property (ROI), it can help you achieve your property investment goals,” commented Pippa Rose, Lead Investment Services Manager at Leah Jay.

Secure Lower Interest Rates

Interest rates can significantly affect your home loan repayments. By refinancing, you can lock in a lower interest rate, thereby reducing your monthly repayments. This can save you a considerable amount over the life of the loan.

When interest rates drop, it’s a good opportunity for refinancing. Lower rates mean you can pay off your mortgage faster or free up cash for other investment properties. Even a small reduction in your interest rate can lead to substantial savings.

This is also a good opportunity to switch between fixed and variable interest rates, so make sure you do the research and look at a range of home loan options.

To Adjust the Loan Term

Refinancing allows you to change the length of your existing loan. If you want to pay off your loan earlier, you can refinance it for a shorter term. This might increase your monthly repayments but will save you on interest in the long run.

Conversely, if you need to lower your monthly repayments, you can extend the loan term. This makes your repayments more manageable but may increase the overall cost of the loan due to accumulated interest over a longer period.

To Utilise Equity

Equity is the difference between your property’s value and what you owe on it. Refinancing lets you access the investment property equity to fund further investments, renovations, or other financial goals.

Using your property’s equity can help you grow your investment portfolio. You can borrow up to 80% of your property’s value. This influx of funds can be a powerful tool for leveraging further wealth-creation opportunities.

To Consolidate Debt

Combining various debts into one loan can simplify your finances. By refinancing, you can consolidate high-interest debts such as credit cards and personal loans into your mortgage. This usually offers a lower interest rate compared to unsecured debts.

Consolidating your debts into your mortgage means you’ll have one monthly repayment, which can ease financial stress. Be mindful, though, that stretching short-term debt over a long mortgage term may increase the total interest you pay.

To Improve Cash Flow

Refinancing can improve your property’s cash flow by lowering monthly payments or providing access to funds to improve the property’s condition. Thus, it attracts a higher-quality tenant, which in turn increases rental income.

“Refinancing an investment property is often seen as difficult when, in fact, it is a straightforward process. Those on a fixed-term loan may incur penalties for ‘breaking’ their loan, so preparing for the end date is key. When differences in fixed and variable rates are high, increased payments can add up to hundreds of dollars,” says Pippa Rose.

Book a Property Health Check

Maximise the potential of your property investment

Eligibility and Requirements

To refinance your investment loan, you need to meet certain lender criteria. These include having a healthy credit score, verifying your income, meeting specific loan-to-value ratios, and ensuring the investment property meets lender standards.

Credit Score Considerations

Your credit score plays a critical role in refinancing an investment loan. Lenders typically look for a score of at least 620, but a higher score can get you better terms. Scores above 700 may qualify you for lower interest rates and fewer fees.

Tip: Check your credit report for errors before applying. Correcting mistakes can boost your score and improve your chances of approval.

Income Verification

Lenders need to verify your income to ensure you can repay the loan. You’ll need to provide documents such as payslips, tax returns, and bank statements. Self-employed individuals may need to offer additional documentation like profit and loss statements.

Consider preparing:

  • Recent payslips
  • Tax returns for the last two years
  • Bank statements for at least three months

Loan-to-Value Ratio

The loan-to-value ratio (LVR) is a critical measure. Lenders usually require your LVR to be 80% or less. This means you must have at least 20% equity in the property. Higher LVRs might attract lenders mortgage insurance (LMI), increasing your costs.

Example Calculation: If your property is worth $500,000 and your loan is $400,000, your LVR is 80%.

Investment Property Criteria

The condition and type of your investment property can also affect refinancing eligibility. Lenders usually prefer properties in good condition and located in stable markets. The property type, such as a single-family home or a multi-unit building, may also influence the lender’s decision.

Property aspects to consider:

  • Current market value
  • Property condition and age
  • Location stability and desirability

These factors collectively determine your refinancing prospects and terms.

Final Things to Consider

Tax Considerations

Refinancing your investment property can have tax implications. You may be able to claim tax deductions on the interest of your investment loan. However, any expenses you incur during refinancing, like break fees or Lenders Mortgage Insurance (LMI), could also be deductible.

It’s important to keep detailed records and consult with your accountant to understand how refinancing will impact your tax situation.

Book in a Property Appraisal

If you choose to refinance, the new or existing lender will require a property appraisal to determine the current market value of your investment property. This is where our Investment Services team can help. During a Leah Jay Property Health Check, our dedicated team will complete a detailed report on your investment property’s value, provide comparable market analysis, sales and leasing activity for your suburb, and independent advice on portfolio optimisation.

You can then use this as part of your refinancing application to show how much equity your property holds and how much borrowing power you have.

Key Takeaways

Our Investment Services team can guide you

    Our Investment Services team can offer independent advice and guidance on the above, ensuring the right conversations are had with your accountant and financial advisor so you can make an informed decision. Get in touch with our Investment Services team today.

    Disclaimer: This information is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your situation, and for professional advice, seek out a financial adviser.