How to refinance a home loan to buy an investment property?
With the price of a property and the growth in Australia over the last forty years, it would be wise to think of every property purchase as an investment, including the one you live in. So you’ve had your first property for a while, be it an investment or a home and it’s been doing well for you. You’re reaping the benefits, but you’d like to advance your financial position. So you decide it’s time to buy another, but, do you have to sell your current home before purchasing a new one? What are your options?
Refinancing a home loan is a smart way to get a lower interest rate, restructure your debt and access equity to invest and possibly expand your property portfolio. We will cover everything you need to know about how to refinance a home loan to invest in property.
What is refinancing a home loan?
Refinancing is the process of switching from your current home loan to a new lender or a new product with the same lender. If you can benefit from a lesser interest rate and lower your monthly payments, refinancing a home loan can assist you in paying it off faster.
In most cases, the thought process starts long before you approach the lender (or chatting with your current lender to secure a more competitive mortgage rate). As interest rates are volatile, lenders often use lower rates to attract new borrowers, it’s worth reviewing your mortgage if you have not done it for a while, however beware that refinancing often sets you back unless there is a significant benefit. .
The process of refinancing a home loan could be more cumbersome than taking out a first mortgage, as there are several factors to be considered. We recommend professional help to ensure you get the best deal on the market that is right for you. A preliminary assessment to secure a credit proposal that helps you decide on a lender and loan product is the first but essential step before you submit an application and have your property valued. Supporting your application with documentary evidence is essential.
How does one refinance to access equity to purchase a new property?
One of the key requirements in purchasing a property is the deposit, but it can be hard to save up enough to buy a second property especially when you are trying your best to pay off the first. But as the value of property increases and you start to pay off your home loan, the amount of equity** increases and fortunately, you can use the equity in your home as a deposit on the next purchase. One way to do this is to refinance your current mortgage and get cash out.
**The difference between the current value of your home and the amount you still owe on your mortgage is referred to as equity. For eg. Adam purchased a house for $500,000 and paid a 20% deposit plus the costs. He borrowed $400,000 on a home loan, and has managed to pay off $50,000 over the last two years. The house is now worth $800,000 and the loan is down to $350,000.
While there is a $450,000 difference, at 80% utilising a maximum of $290,000 would avoid the need for lenders mortgage insurance, hence the investments could be as much as $1,400,000, setting aside $50,000 for costs. So long as there is the capacity to borrow.
Equity grows in two ways:
How much equity do you require to refinance your existing loan?
You can utilise the equity in your home to purchase an investment property without first selling it. If you have sufficient equity, you can borrow 100% of the new property’s value without using any of your cash on hand. While most lenders will allow you to access up to 90%, one needs to consider the lenders mortgage insurance that kicks in and the additional scrutiny this may cause.
From time to time, lenders will offer to lend 85% of the value of a property without Lenders Mortgage Insurance. Another reason to get an experienced professional to find the best option for you.
How can you access equity?
Refinance with Cash Out: This is when you borrow more than what you owe. Factors such as the value of the security property, your borrowing capacity and your credit history will determine how much equity you can access at any given time.
Through a line of credit: This is a product that works much like an evergreen credit card. A line of credit is quite similar to a credit card that uses your home as collateral, allowing you to keep reusing the amount you pay off upto a approved credit limit.
Once you’re satisfied with the interest rate and terms, you can apply for the new loan product. The refinance process will be similar to how you applied for your home loan in the first place. Income documents such as pay slips, income statements, tax returns and rental statements or estimates along with proof of identity and statements of all your current facilities will be required. Your borrowing capacity and credit worthiness will be assessed prior to a formal approval by the credit manager at the lender to ensure that you can afford the new loan repayments and future interest rate increases.
Things to remember before you refinance a home loan to buy investment property
- The first step is to determine if you have the wherewithal to go through the process, an experienced professional can help mitigate some of the pitfalls and save you heaps of money, time and stress.
- The current market value of your property, your incomes including future rentals and your credit history are key to securing finance
- Check to see if you have enough equity in your home.
- Beware that cash backs, rebates and such short term incentives should not be the reason you apply for finance or for any particular product
- Any investment is a risk, ensure you have a buffer to help you overcome the risks.
What are the advanatages of refinancing a loan for buying an investment property?
- It is a good way to use equity in your home and save time by not having to save a deposit.
- Avoid paying thousands of dollars in LMI premiums.
- It could be the way to pay off your home loan faster
- Potentially save money by refinancing to a lower rate
- Maximise the tax benefits offered in negative gearing an investment
- Build a portfolio of investments that will help in retirement.
Should you first pay your home loan or investment loan?
You’ll have a roof over your head when you pay off your home loan, and paying down your investment loan will give you more cashflow and equity. Loans taken out for investment purposes and investment expenses provide a tax benefit, these incentives are not available on your home loan, hence you may wish to pay off your home loan first.
Borrower First can lead you the way!
More than mortgage brokers, you gain from our experience in financial planning, expertise in property investment and debt management. Purchasing your second investment property is an exciting step in building your portfolio and increasing your wealth. This is also a good opportunity to think about your personal finance strategy and how you want to proceed. When you decide to refinance your home loan in order to purchase an investment property, Borrower First can assist you achieve your financial objectives.
Contact us today by phone or online.