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What to know before you refinance your investment loan

Whether you are an owner occupier or an investor, refinancing can be a great way to save money and find a loan better suited to your current situation. The process of refinancing an investment loan can seem daunting, and you may be wondering whether it’s all worth it.

In this article, we’ll answer some common questions about investment loans and refinancing rental properties.

How soon can you refinance an investment property?

Theoretically, you can refinance an investment property as soon as you like after buying or getting a new home loan, but this isn’t always a good idea. You have to weigh up the benefits of refinancing with the costs associated.

To avoid paying LMI, it’s smart to refinance when you owe less than 80% in value on your investment home loan. Lenders also tend to view borrowers with a lower loan to value ratio (LVR) as less risky.

Refinancing is pretty straightforward if you owe less than 80% and are on a variable rate. However, fixed interest rate borrowers have to be aware of the penalties that can be imposed for refinancing or ‘breaking’ their loan in any way. Often, if a borrower refinances their fixed rate mortgage before the fixed period is over, they can be charged break costs.

Refinancing costs may include:

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When should you refinance your investment home loan?

1. When your investment loan no longer supports your needs

Your investment loan should grow with you, rather than feeling like a burden. If your life and needs have changed since you initially secured your home loan, it may be time to review your loan and check whether it still meets your needs and financial circumstances.

2. When you can get a better deal

Many borrowers refinance with the aim of getting a lower interest rate, cutting back on fees, and adding loan features. Reviewing your interest rate and loan terms and conditions regularly is always a good idea. Lenders also may charge a loyalty fee to existing customers, meaning that new customers are getting lower interest rates and home loan deals.

3. To consolidate your debt

Do you have a personal loan, car loan, and/or credit card debt? These debts can be annoying to keep track of, especially if you have an investment loan to deal with too. With debt consolidation, you can consolidate these debts under your investment loan to just make one monthly repayment, instead of multiple. It also means all your debt will be charged at your mortgage interest rate, which is typically lower than interest rates associated with unsecured debt.

4. To get cash out

You may be able to access up to 80% of your investment property’s equity. The equity in your home can be put towards other investments (e.g. a deposit for a new investment property), renovations, and more.

5. To switch lenders

When you’re unsatisfied with your current lender, it’s perfectly reasonable to consider finding a new one. Maybe your lender is bad at communication, customer service, or they haven’t adapted to the digital age and making repayments is a pain. A new lender could offer you a fresh start, and they may offer improved loan terms.

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What are the benefits of refinancing an investment loan?

  1. Reduce your monthly repayments: borrowers can often find lower interest rates and zero-fee home loans when refinancing.
  2. Add on useful loan features: save on interest and optimise your home loan with an offset account or redraw facility.
  3. Tap into your equity to fund other investments: do you have your eye on another property? You may be able to fund the deposit with money from your equity.
  4. Switch between a fixed and variable interest rate: if you’re looking for stability and easier budgeting, a fixed interest rate may be a good move. If you prefer flexibility, a variable interest rate could suit you more.

What are the drawbacks of refinancing an investment loan?

  1. Refinancing usually comes with fees: read more about refinancing fees here.
  2. Your LVR needs to be at a certain level: lenders may not consider your new loan application if you owe more than 80% of your property value on the loan. If your LVR exceeds 80%, you may be able to refinance if you pay LMI.
  3. Several hoops to jump through: Your credit score will likely be assessed, and you will need to provide substantial proof of income. This extends to your rental income, not just your income tax returns and pay slips. If lenders perceive your rental income to be poor, or notice that your property has been vacant, they may not consider your rental income to be income at all.

How much equity do I need to refinance a rental property?

Your refinancing options will be greater if you have at least 20% equity in your property. If you have less than 20% equity, you may still be able to refinance, but might be subject to LMI charges.

How much equity can I take out of my rental property?

The amount of equity you can access will depend on your lender and what you intend to use the funds for. Typically though, investors can take out up to 80% of their investment property equity.

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What else should you be aware of when refinancing an investment loan?

1. Honeymoon rates

A honeymoon rate is a lower introductory interest rate for an initial period of time. For example, a lender may offer a honeymoon rate of 3% for the first year of the loan, and afterwards the interest rate may revert to a higher rate. Always figure out whether these kinds of deals are worth it in the long term. But, remember that refinancing out of these home loans is possible too!

2. Look at the whole picture

It can become easy to be swayed by the promise of low fees, a low rate, or maybe a refinancing sweetener (e.g. a cashback deal). These things all sound appealing, but generally shouldn’t form the basis of your decision to refinance to a certain loan.

Sometimes low fee offers and other deals can distract you from an interest rate that is higher than the norm. Always look at the loan as a whole, rather than striving to find the lowest rate or the best offer.

3. Tax deductions

Investors are lucky to benefit from a number of tax conditions associated with their rental properties. These also extend to borrowing costs, which are often tax deductible. It’s a good idea to look into these with your tax accountant.

If you’re getting ready to refinance your investment home loan, it’s a good idea to get in touch with an expert. Lendi’s Home Loan Specialists can take the guesswork out of property investing and provide you with advice. Get in touch today for more information.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: investing, investment, investment property, refinance, credit score, lmi (lenders mortgage insurance), equity, home equity, home equity loan, break cost

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