Loan refinancing is a strategy used by property investors to access funds – usually to grow or improve the value of their property portfolio. The right time to do it largely depends on your strategy, plans and equity.
In this article, we highlight some of the key considerations for this strategy and how savvy investors often use the funds. If you’re considering investing in property or taking the next step in your investment journey, remember your mortgage broker is a great source of information and support, so please don’t hesitate to give us a call.
Why refinance?
Refinancing your loan allows you to access the equity in your property. Equity is the proportion of the property you own – for example, if the property is worth $500,000 and you owe $200,000 to the bank, then you have $300,000 in equity.
Savvy property investors use their equity for a variety of different purposes:
- To renovate and add value to an investment property
- As a deposit for their next investment property
- To fund their lifestyle and living expenses.
Another popular reason to refinance is to secure a more competitive interest rate or a loan that better suits your needs. There may be loan features that can improve your interest savings or cash-flow, like offset accounts and redraw facilities. It pays to talk with your mortgage broker and reassess your property investment loans regularly to ensure you’ve got the right loan to maximise your financial benefits and tax advantages.
Key considerations
1. Market value and equity
Generally, the right time to refinance your investment property is when the equity has grown sufficiently to take the next step in your investment strategy, or to fund your renovation plans. To get an idea of the value of your property, and how much your equity has grown, you’ll need to compare public sales data for similar properties in the area. Ask us for a free suburb and property profile report with the latest on-the-market information.
You could also ask real estate agents for an estimate (make sure you hit up at least three different agents) or pay for a professional property valuation. Keep in mind that a lender’s valuation will be on the conservative side of any estimates, and a formal valuation will be required by the lender before they will allow you to refinance.
2. Consider the costs
Switching lenders and refinancing your investment loan can help you achieve your goals, but it’s important to consider any additional costs involved. These may include break fees or discharge fees, establishment fees for your new investment loan, and valuation fees. Speak to us and we’ll run you through the costs and help you decide whether refinancing is worthwhile right now, or if it may be better to wait until your equity has grown further.
3. Investigate how the market is performing
Part of the decision about whether to refinance will depend on how the property market is performing for your investments. National dwelling values declined in many capital cities since the COVID-19 pandemic started, but have started to improve recently, while regional dwelling values have been edging higher. Therefore the location of your investment property could be a key consideration when deciding to refinance.
It’s important to be aware that if you refinance after your property’s value has decreased, you may be facing negative equity territory. This is when the value of your investment falls below the outstanding balance on the mortgage. In this situation, it may be better to wait until the market recovers before you consider refinancing.
4. Other considerations
The investment lending landscape has seen some changes recently with APRA’s new regulation and the RBA’s lowest interest rate in history. As a result, we’re seeing competitive deals available in the market, and interest rates being reduced by many lenders. This means it’s a good time to reassess your investment strategies and refinance requirements.
Talk with your mortgage broker first
If you’d like to access equity to grow your investment portfolio or renovate, or you just want to know you’re getting a competitive deal, it’s worth having a chat with your mortgage broker. You’ll find we are a wealth of information – and it’s always best to make a fully informed decision. If the time is right for you to take the next step in your investment journey, we’ll help you find the right refinance option to help you achieve your goals. Call us today!
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