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With low interest rates on offer by several lenders, refinancing is a popular option to save money on your mortgage. More and more owner occupiers are realising the futility of sticking with their bank unless it is the most profitable deal they can muster. But how are things looking up for investors?

According to data, more than 7.9% of Australians or 1,764,924 people own an investment property. It is also true that investors pay a higher rate of interest than owner occupiers, which means refinancing to a lower rate is quite a lucrative option. But, is it really possible?
 
Refinancing rental property: what you should know
 
According to the experts, it is! However, refinancing an investment property is a little different from refinancing your own house. Especially with APRA tightening the noose around investment lending earlier this year, large banks such as the CBA decided not to accept any applications for refinancing investment loans. Today, investors might find it hard to secure competitive home loan deals for refinancing, but it is not impossible.


How can investors benefit from refinancing?

Before you decide to switch your home loan, you must understand how refinancing is going to benefit you. Here’s how refinancing can help you:

  • Lower monthly repayments
  • More savings that can be utilised to improve the property
  • Higher return on investment
  • Use your equity to buy additional properties or finance other investment options


Depending on your income, living expenses, the value of the property you wish to refinance and the amount you need, it is possible to find a home loan deal for your requirement. Here’s what you need to know before you go looking:

  • Costs – Yes, refinancing is not free. There are several costs attached, such as the application fee, discharge fee, insurance, taxes, etc. Besides, the interest rate for investors is higher than owner occupiers. In general, refinancing is beneficial if your rate is cut down by at least half a percent or you breakeven within two years of refinancing. As you crunch the numbers, it is also essential to take into account the associated costs of refinancing apart from the interest rate.
    That being said, savvy investors can still find competitively priced home loans through experienced mortgage brokers. As different lenders have different terms for refinancing an investment property, a mortgage broker could put you in touch with lenders that see your situation favourably. We suggest that you take quotes from minimum three lenders before making the final choice. You can speak to a mortgage broker here.

  • Loan to Value Ratio (LVR) – Your loan to value ratio represents your equity in a property. For example, if you have a mortgage of $450,000 on a property worth $600,000, your LVR is 75 percent. This number also represents the risk you pose to a lender – as, the higher your LVR, the lower your equity. Banks usually charge a higher rate of interest on high LVR loans. Besides, when it comes to refinancing, many lenders may not allow you to refinance unless your LVR is 75 or lesser. In case of owner occupied properties, this requirement is more relaxed.

  • Credit Score – Your credit score plays a significant role in determining the interest you pay on your home loan or investment loan. The higher your credit score, the easier it is for banks to trust you with their money. As an investor, maintain a high credit score and clean credit history to improve your chances of securing a good refinancing deal. Read further for simple hacks to boost your credit score.

  • Proof of income – Investors are assessed a little differently from owner occupiers when it comes to refinancing a mortgage. While owner occupiers only need to provide standard documents such as tax returns and salary slips, investors are also required to prove the rental income they receive from their property. In case the income is not continuous or the house has been vacant for some time, some lenders might not consider rental to be a part of your income at all. Luckily, all lenders have different criteria for refinancing, and it is possible to find one suitable to your case. Contact a mortgage broker to know more.

  • Tax deductions – Investors enjoy a number of tax deductions in Australia. But did you know that you can claim a tax deduction for borrowing costs and exit fees when you refinance an investment loan, in some instances? We strongly recommend that you speak to your tax advisor to understand this better and keep all your bank statements and receipts handy, meanwhile.

 


Should you refinance an investment property?

With a good credit score, clean payment history and low LVR, it is possible to refinance your property for a lower rate and other benefits. Most often, investors refinance their rental properties to fund additional properties, which could be the ticket to building a successful property portfolio, if planned well.

Investors would benefit from knowing that every lender has different criteria around refinancing. Some don’t even offer refinancing for rental properties. So, it makes sense to take quotes from several lenders or contact a mortgage broker to help you. In the end, whether you decide to refinance or not is something only you can answer.
However, our mortgage brokers are here to help you. Pose your questions online to receive answers from mortgage experts at HashChing, absolutely free.

 

By Vidhu Bajaj,
HashChing Content Writer

 

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