Refinancing an investment property home loan can help ensure you're making the most of your asset. It can minimise interest payable, reduce fees, and even 'recast' a 30-year mortgage thereby shrinking repayments. All this can help improve rental yield and relieve cashflow pressures.
The process of refinancing an investment property mortgage is largely similar to refinancing any other loan. But as an investor, a strategically considered mortgage can hold additional tax benefits.
Here's a breakdown of things to consider before deciding to make the switch and refinance an investment home loan.
Investment home loans 101: What is refinancing?
Refinancing is the process of changing from one mortgage product to another one. Common reasons to refinance an investment property home loan include:
- Reduce the interest rate on a home loan
- Shrink home loan fees
- Improve or vary your loan's terms and conditions
- Secure particular features or perks
- 'Recast' a home loan
- Begin a new interest-only period
- Access equity built up in an investment property
How refinancing can see investors holding home loan debt indefinitely
Most mortgages offer terms of up to 30 years while most home loan lenders allow a borrower to make interest only repayments for a max of five to 10 years before beginning to repay their debt. As property investors may find debt benefits them at tax time (more on this below), some mightn't want to repay their debt.
Fortunately, there is a solution. An investor might take out a new home loan and, after a few years, 'recast' it - ergo, refinance to another mortgage, essentially restarting the clock. This could see them holding mortgage debt or making interest only repayments (or both) indefinitely.
Savings.com.au's two cents
Refinancing an investment home loan can see a property owner save money, access equity, and ensure their mortgage is meeting their needs at any given point of the market cycle. This can help them make the most of their wealth-building, passive income-producing asset.
However, refinancing isn't a one-size-fits-all solution.
Calculating if the benefits of refinancing outweigh the drawbacks can be a worthy use of time. It might only be worthwhile if you'll recoup refinancing costs within a reasonable timeframe.
If you're not sure whether refinancing is right for you, consider speaking to a mortgage broker or financial adviser.
Internal vs external refinancing: What investors need to know
There are two types of refinancing: internal refinancing and external refinancing:
- Internally refinancing: Switching to a different mortgage with the same provider
- Externally refinancing: Switching to another mortgage with a different lender
Internally refinancing is often cheaper than externally refinancing, as there's less paperwork and it doesn't need to pass between two institutions. It's also typically simpler, especially if you already do the majority of your banking with one institution.
However, externally refinancing often yields better savings, as lenders tend to compete for your business.
- Pro tip Sometimes just letting your lender know you're considering refinancing can spur them to offer you a better deal.
Property investors can refinance to access equity
Home equity is the difference between a property's value and the amount owing on an associated mortgage. If that number is substantial and you have a good use for the wealth it represents - perhaps renovating your property or purchasing another asset - you could refinance your investment property home loan to access it.
For example, let's say you purchased an investment property for $500,000 with a $400,000 interest only mortgage. If after ten years its value had risen to $650,000, you'd have $250,000 of equity.
While that's wealth, it's not money. That is, unless you unlock it. You might access that equity by selling the property, but what if you don't want to do that? Well, you could also refinance to a larger mortgage.
How to use refinancing to unlock investment property equity
By refinancing to a larger mortgage than you initially had, you could unlock equity residing in your rental property. It's that simple.
Let's revisit the above example. Now, you might decide to refinance your investment mortgage to one with a balance of $520,000, leaving you with an 80% loan-to-value ratio (LVR). That's essentially $120,000 of cash that could be burning a hole in your pocket.
How to find a competitive investment home loan refinancing deal
What constitutes a competitive investment home loan refinancing deal will depend on your individual circumstances, desires, and needs. Keep in mind that there's no such thing as a 'refinancing' home loan - pretty much all home loan products are available to home loan refinancers so don't limit yourself to those advertised specifically.
Here are a few things you might consider when comparing investment mortgages to find a great solution to refinance to:
A competitive interest rate
Perhaps the simplest way to judge if a deal is 'good' or not is to consider its interest rate. A quick glance at your investment loan rate and a scan of the broader market will likely reveal if you're getting a low-rate deal.
To get you started, here are some of the lowest rate investment home loans on the market right now:
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Extra Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.24% p.a. | 6.28% p.a. | $3,075 | Principal & Interest | Variable | $0 | $530 | 90% |
| Promoted | Disclosure | ||||||||||
6.04% p.a. | 5.95% p.a. | $3,011 | Principal & Interest | Variable | $0 | $0 | 80% |
| Promoted | Disclosure | ||||||||||
6.14% p.a. | 6.16% p.a. | $3,043 | Principal & Interest | Variable | $0 | $350 | 60% |
Low fees
But don't get sucked into an interest rate trap. Make sure to also compare the fees charged on particular home loan products. Some lenders can disguise a high-fee product with low rates, and that's why it's particularly important to consider the comparison rate.
A home loan's comparison rate condenses interest charges and fees, displaying the 'true cost' of a $150,000 mortgage over 25 years.
Useful features
the right features can make an investment loan far more cost-effective, especially if you’re managing cash flow, rental income, or multiple properties. Popular features to look for include:
- Offset accounts
An offset account can reduce the amount of interest you pay by offsetting your loan balance with your savings. For investors, this can be handy for managing rental income or keeping extra funds accessible for repairs, vacancies, or tax time. - Redraw facilities
If you make extra repayments, a redraw facility lets you pull that money back out if needed. - Extra repayments
Being able to pay more than the minimum can help reduce your overall interest costs. This is common on variable rate mortgages but isn't a given for fixed rate home loans. - Interest-only options
Some lenders offer longer interest only periods than others. If you're planning to pay interest only over the long term, it could be worth looking for a lender offering 10-year interest only terms.
Pros and cons of refinancing an investment loan
As with anything, there are pros and cons to refinancing your investment property home loan. The benefits can be great, but do they offset the potential drawbacks? Both sides of the coin should be considered before you decide whether the risks outweigh the rewards.
Benefits of refinancing an investment property mortgage
- Interest savings
If refinancing to a cheaper rate, you could save thousands in interest costs - Access to equity
Opportunity to unlock built up equity - Potential tax benefits
As interest on debt used for investment purposes is generally tax deductible (as are fees charged on investment loans), thus altering an investment property home loan could result in tax savings
Drawbacks of refinancing an investment property home loan
- Refinancing costs
Refinancing costs can include application fees, legal costs, lenders mortgage insurance (LMI), loan registration costs, discharge fees, and break costs (for those on fixed rates) - Can be time consuming
Refinancing can also take time. Borrowers may need to scrap together up to date documentation and sit through a waiting period while their loan switches over