What to know before refinancing your investment propertyAugust 30 2023
"Investor loans are a part of many investor's journey, and therefore a refinance is more than likely a staple as well." - Marco Zande, Strategy Executive.
If you’re currently not happy with your interest rate it could be worth refinancing and getting a better deal.
However, refinancing an investment property loan is a little bit different from refinancing an owner-occupier loan. Here are five things you should know before securing a better deal.
1. The cost of refinancing
Even though refinancing to a better rate can save you money down the track, it will initially cost you a bit of money. There are several costs which may be attached to refinancing, such as the application fee, discharge fee, settlement fee, mortgage registration fee, exit fee, and so on.
With that said, interest rates for investor loans are generally a bit higher than rates on owner-occupier loans so refinancing to a lower rate will generally work out to be cost-effective in the long run. You may even be able to recoup most, or all of these costs after a few months of repayments, or within the first few years.
2. Tax deductions
One of the perks of being a property investor is the number of tax deductions you may be able to take advantage of. If you’re refinancing an investment loan, did you know that you might be able to claim a tax deduction for the borrowing costs and exit fees? There are some cases where this can apply which is why it's recommended to speak with your tax adviser first.
3. Your loan to value ratio (LVR)
When you’re refinancing, the higher your loan to value ratio (LVR) the lower your equity, and the higher the risk you represent to the lender. If you have a high LVR, the lender may charge you a higher interest rate to offset this risk. Investment loans generally have stricter LVR requirements and many lenders won’t even allow you to refinance unless your LVR is at least 75% or below.
4. Credit rating
Your credit score plays a big role in determining what interest rate you’ll pay on your loan - the higher your credit rating is, the less risky you are in the eyes of the lender. For investors, having a good credit score is especially important as there are tougher lending restrictions on investment loans.
Refinancing represents an application for credit, which will appear on your credit report and can influence your credit score. If you refinance too often, lenders may be wary about allowing you to refinance.
5. Proof of income
When refinancing a mortgage, investors are scrutinised more than owner-occupiers. Investors need to provide more documentation of proof of income, including tax returns and salary slips, rental income received from the property, and so on. In cases where the property has been vacant for some time, or where rental income has been intermittent, some lenders may not consider the rent to be part of your income at all.
Source: Your Investment Property
Mortimer, M. (2023, August 14). 5 things to know before refinancing your investment property loan. Yourinvestmentpropertymag.com.au. https://www.yourinvestmentpropertymag.com.au/property-finance/5-things-to-know-before-refinancing-your-investment-property-loan