What are the pros and cons of refinancing your investment property loan?
Let’s start with the benefits of refinancing.
- Lower interest rates: By refinancing to a new loan, you can secure a lower rate to help reduce your overall monthly repayments. And you might also save extra cash along the way.
- Your new loan suits your needs: You might be looking for a fresh start and a new loan might suit your new life and financial situation better. There might also be features on your new loan that you didn’t have access to before, such as making additional repayments and free redraw.
- Consolidated debt: If you have any other loans, then refinancing allows you to consolidate them into one low investment property loan. This means you can make one monthly repayment, instead of managing multiple repayments each month.
- You can cash out your equity: Cashing out your equity means you get some money out of the equity you’ve built up in your home at the same time you’re refinancing. This can help you access additional funds for other uses, such as renovating your home, buying another investment property or paying for a wedding.
And now let’s consider the possible drawbacks.
- There are upfront costs you’ll have to pay that can put some investors off. But the long-term benefits of refinancing often outweigh these costs down the track.
What happens when you refinance your home loan?
Some investors can take around two or three years after purchase before they decide to refinance. But you can refinance whenever it’s right for you – whether that’s six months or six years.
From a process perspective, you’ll need to have some information on hand when you apply, including:
- Personal information, like your driver’s license
- Proof of your income and current employment, like a payslip
- Information that outlines your financial situation, like a list of your assets, debts and expenses
What costs are involved?
There are different upfront costs you need to pay if you want to refinance. By knowing what they are, you can budget for them and not get caught off-guard when they come up.
If you’re refinancing from one bank to another, the outgoing bank might charge you:
- Discharge costs, which is an amount you pay to close off your loan
- Break fees, which happen if you end a fixed rate loan early
You might also come across some of these costs from the new bank:
- Loan application fees, which is a one-off cost to set up the new home loan
- Title search fee, which is when the lender searches for information about the new property
- Lenders Mortgage Insurance (LMI), if the investor has less than 20 per cent of their home’s equity
Did you know that you can claim tax on some of these expenses? It can pay to keep your investment property records in order, so you’re ready to go when it’s tax time.
How much equity do you need to refinance?
You can use your home’s current equity to help you refinance your loan or buy another investment property – it comes down to what works for you and your goals.
The amount of equity you need to refinance will need a loan-to-value ratio (LVR) of less than 80 per cent. This is a percentage that shows how much money you want to borrow compared to the value of the investment property you own.
If you still need to repay over 80 per cent of your current home loan, then you’ll have to pay LMI on top of the other costs that are involved in refinancing.