Refinancing investment property can be a savvy financial move, especially in a changing economic climate. But when is the right time, and what are the best strategies? This blog cuts through complexity to offer clarity on your refinancing investment property options, the impact of market conditions, and what you need to consider to make the most of your investment.
Key Takeaways
- In the context of the Australian property market’s dynamic environment, it is essential to consider current trends, such as interest rate fluctuations and property value increases, when refinancing investment properties.
- Investors planning to refinance should explore different financing options, like line of credit loans, and understand both the benefits and the potential risks, which include higher interest rates and the use of one’s home as security.
- Refinancing offers multiple financial benefits such as lower interest rates and access to equity, but it also involves potential risks and costs like valuation fees and market fluctuations that can affect property values and loan terms.
Introduction
Before pursuing refinancing, you should evaluate your personal financial situation. It ensures that the decision aligns with your individual goals and current financial position, taking into account the relevance of the information to your specific circumstances. Additionally, finding the best refinancing deal requires you to compare offers from different lenders, including your existing lender.
Understanding the current property market trends, which significantly impact your refinancing journey, is the next step.
Overview of The Current Property Market Trends
The Australian property market is currently a dynamic environment. For instance, the Reserve Bank of Australia is currently increasing the cash rate, which directly affects lending rates and can influence the affordability of investment property loans. If you’re considering refinancing your investment property, it’s important to factor in these interest rate fluctuations.
Moreover, the property market is demonstrating robustness, with home values reaching a new pinnacle. This increase in property value can lead to increased rental income for investors and influence the decision to refinance.
In terms of investor engagement in the property market, as of May 2022, the value of new loan commitments for investor housing experienced a modest increase of 0.9% to reach $11.2 billion. This trend indicates sustained investor engagement in the property market, and refinancing can help investors access their investment property equity for further investments.
Financing Options for Refinancing Investment Properties
There are several options available for refinancing an investment property. One such option is a line of credit loan. This type of loan enables you to:
- Utilize the equity in your home as a deposit for an investment property
- Offer flexibility in loan repayments
- Help you manage your finances more effectively.
A line of credit loan offers the following benefits, in contrast to a fixed-rate loan:
- You can access your credit limit as needed
- You only pay interest on the amount you use
- This structure can help optimize tax-deductible debt through interest-only repayments.
It’s important to note, though, that a line of credit loan carries potential risks. These include:
- The possibility of higher interest rates
- Using your home as security for an investment property
- The potential of repaying multiple loans, including your home loan, the line of credit, and your investment loan, as well as managing an existing loan
- As interest accrues to your line of credit limit, you may end up paying more interest over time.
How to Refinance an Investment Property?
Having explored the financing options, we can now examine the process of refinancing an investment property. Refinancing encompasses obtaining a new mortgage to settle an existing one, typically with the aim of enhancing the loan terms, modifying the loan structure, or gaining access to equity.
Before making a decision to refinance, understanding your financial standing and objectives is vital. It confirms that refinancing will help you achieve your investment goals and puts you in a favourable position to leverage the benefits of refinancing. This includes considering the impact of refinancing on both home loan repayments and investment loan repayments.
When looking to refinance, it’s a good idea to explore offers from different lenders, consider the various loan types, and use comparison rates to evaluate the cost-effectiveness of different loan options. Investors should also consider the potential to claim tax deductions on specific refinancing costs. This can help minimize tax liabilities and maximize savings.
The role of a mortgage broker in the refinancing process involves:
- Evaluating an individual’s financial circumstances
- Providing loan option comparisons
- Facilitating the application process, which may involve coordinating property valuations when transitioning to a new lender
- Providing guidance on tax deduction opportunities related to refinancing.
Benefits of Refinancing an Investment Property
Refinancing an investment property can provide a favourable financial outcome. Some potential benefits of refinancing include:
- Transitioning to a loan with reduced interest rates, which may lead to potential savings of thousands of dollars
- Decreasing the total loan cost, resulting in long-term savings, particularly for individuals with high initial rates or loans that no longer align with their current financial requirements
- Lowering investment loan repayments, freeing up cash flow for other purposes
Consider refinancing your investment property to take advantage of these potential benefits, such as securing an investment property loan with better terms.
In terms of cash flow, refinancing can have a positive impact by potentially securing a lower interest rate, leading to lower monthly repayments. This improved cash flow can provide additional liquidity for other investments, expenses, or savings accumulation.
Refinancing offers investors the opportunity to:
- Leverage the equity accumulated in their property
- Pursue further investment prospects
- Refinance for a higher loan amount than the outstanding balance
- Disburse the surplus amount as cash
- Channel the cash into alternative investment opportunities
Risks of Refinancing for Investment Property
While the benefits of refinancing can be enticing, understanding the potential risks is equally important. The expenses related to refinancing an investment property encompass initial costs ranging from $200 to $1000, potentially covering a valuation fee. Additionally, there may be bank fees for the loan account and interest payments on the loan.
Fluctuations in market conditions can also impact property values and interest rates, consequently influencing the terms of refinancing and the overall feasibility of the investment. A downturn in market conditions may cause an investment property to be undervalued, potentially leading to higher loan-to-value ratios and less advantageous refinancing terms.
Finally, every new loan application prompts lenders to investigate the applicant’s credit report, which could temporarily lower their credit score. However, judicious management of the new loan can gradually improve the credit score. It is important to balance the potential short-term negative impact on the credit score with the long-term financial benefits of refinancing.
Tax Implications and Considerations
The decision to refinance an investment property also carries certain tax implications and considerations. For instance, expenses linked to rental properties, such as borrowing costs for refinancing, are frequently eligible for tax deductions. The deduction for borrowing expenses in the first year is determined through a calculation that takes into account:
- a proportion of the borrowing expenses
- the relevant number of days in the year
- the fraction of the loan amount associated with the rental property in relation to the total borrowed amount.
However, as tax considerations vary from person to person, seeking professional tax advice is important. This helps in determining eligibility for tax benefits based on the loan structure, staying informed about current tax implications, and maximizing potential claims.
One of the tax implications is the capital gains tax (CGT), which is imposed by the Australian Taxation Office on the gains generated from the disposal of an income-producing asset, such as an investment property. It becomes relevant to property owners upon the sale of their property and the realization of a profit.
Conclusion
In conclusion, refinancing an investment property involves several key considerations. These include:
- Assessing the costs associated with refinancing
- Understanding the tax implications and possibilities for deductions
- Reviewing the loan-to-value ratio (LVR)
- Ensuring a good credit rating
- Providing proper proof of income
All of these factors are vital when considering refinancing an investment property.
Furthermore, it is necessary to consider the balance between benefits and risks in the refinancing decision. This allows for a careful consideration of:
- potential reductions in interest rates
- the potential for acquiring additional investment properties
- the possibility of lowering payment rates
- the benefits of cash-out refinancing against additional costs, such as Lenders Mortgage Insurance (LMI)
With the potential to secure better interest rates, increase cash flow, and gain access to equity for reinvestment, refinancing an investment property can lay the foundation for additional financial growth and investment opportunities.
Frequently Asked Questions
Is it possible to refinance an investment property?
Yes, it is possible to refinance an investment property, but the lender may charge a higher interest rate if the loan-to-value ratio is high. Consider refinancing if your LVR is at least 75% or below.
Is cost of refinancing tax deductible?
Yes, the costs associated with refinancing an investment property loan, such as breaking your existing loan early, are tax-deductible.
How do you turn an owner occupied into an investment property?
To turn your owner-occupied property into an investment property, you should notify your credit provider and change your home loan to an investment loan to avoid breaching your loan contract.
Is mortgage tax deductible?
Yes, mortgage interest is tax deductible if you are using the property to earn rental income, as part of the investment strategy known as negative gearing. However, residential property that is not used for rental purposes is not eligible for tax deductions.
What is the concept of refinancing an investment property?
Refinancing an investment property entails replacing the current loan with a new one to achieve more favourable terms, such as lower interest rates or more flexible repayment options.
