Investment tip: Is refinancing the right strategy for you?

When leveraging equity, lenders usually consider only 80 per cent of the total value of your home minus the debt you still owe to it as the useable equity—meaning, if the 80 per cent value of your property is $400,000 and the debt you still owe against it sits at $250,000, then your useable equity is $150,000.

Meanwhile, home loan refinancing allows you to replace your current home loan or amend some of its features. As you find loan options with competitive rates and less ongoing fees, you can shorten the loan term and reduce repayments on your loan. This will allow you to pay down your debt faster, own your home sooner and consolidate other personal debts.

According to mortgage broker Ross Le Quesne, reviewing your mortgage regularly is certainly one of the most effective ways to navigate the ever-changing investment landscape.

He said: “When we see people refinance, it’s normally not just to save money. It’s because they want to buy another property or they want to do some renovations or they want to do something else.”

“They go, ‘The rate discount is a bonus’, but as we’ve seen, on an $800,000 mortgage, you can potentially save between $7,500 and $10,000 on a big, big interest rate differential. Should anything happen — repairs, maintenance, vacancies — you don't have to sell your properties,” the mortgage broker added.

As good as it sounds, experts remind investors that refinancing as a strategy is still categorised as a simple supplementary loan. Consider your personal financial circumstance and your long-term investment plan before shopping around for new home loans and loan features or extracting equity from your existing properties.

Advantages of refinancing

Finding enough financial resources is one of the most common struggles for budding investors who want to grow their portfolio. In fact, a huge percentage of Australian investors has yet to figure out how to get past the first property — how can you possibly save for deposit while paying off a home loan?

Refinancing, fortunately, works in a way that makes that second property more accessible.

When you decide to incorporate your accumulating equity into your strategy, in most cases, you will only need to save a deposit for the first property. The succeeding properties can be funded through the capital gains built up on your prior investment.

If you extract the equity in your home to buy an investment property, you may also enjoy potential tax benefits.

On the other hand, if you opt for home loan refinancing, your interest rates and repayments can be adjusted to suit your current financial situation. You may also pick from several loan features such as offset accounts, redraw facilities or extra repayment options.

As your mortgage repayments decrease, you can consolidate other personal debts and ultimately maximise your rental income and overall return on investment.

Risks of refinancing

While refinancing can definitely assist you in funding your portfolio, the strategy does not come without risks.

For one, extracting equity from your existing property or refinancing your home loan will have costs associated to it. If you fail to secure a cash flow buffer for these costs, you may end up losing more money than you can save.

Moreover, if the value of the property you purchased declines, you will still have to pay the mortgage. If the property cannot cover mortgage repayments due to low rental income or other affecting factors, you will need to top up with your own money to make the repayments.

Until the mortgage is fully paid, you can only access profits in your investment property when you sell it or borrow against it.

Expert advice

Before deciding to refinance your property, take time to engage the right professionals in order to get an in-depth understanding of the options available to you as well as the benefits and risks that come with them.

The current investment landscape proved to a big challenge to investors as it gets harder and more expensive to access funds due to stricter lending policies, taxes, cuts on benefits and other regulatory change, which is why doing due diligence and seeking professional guidance has never been more critical.

When looking to refinance home loans, experts advise investors to be on the lookout for special deals and offers that will help them minimise costs and maximise potential returns.

If you’re set to buy a new property through refinancing, take a long-term view and research on factors that will drive growth into the market, including population, infrastructure as well as supply and demand. Moreover, consider the fluctuations of interest rates and its implication on your finances.

Lay out a clear investment plan before jumping into the refinancing strategy. Factor in all costs, from purchase to management, and set up buffers and exit strategies in case something unexpected comes up.

A good mortgage broker is among the key professionals that can guide you through the process of refinancing. Aside from helping you work out the cost of refinancing, they can also give more tailored recommendations based on your personal financial capabilities and limitations.

When done right, refinancing is one of the best ways to save money, control your debt and give you more flexibility as you work to achieve your financial goals.

 This information has been sourced from Credit and Finance, Quantum Savvy, realestate.com.au, Domain and the Smart Property Investment website.

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