For most Australians, the dream is to purchase their own home. But once you’ve had your home loan for a few years, it’s only natural to start itching for new investment opportunities.
By refinancing your current home loan, you could access the equity you’ve already accumulated on your current property, giving you a sizeable portion to help build a deposit for an investment property.
How does refinancing your mortgage work?
Refinancing to invest means reworking your current mortgage to give you access to the equity you have already earnt. This could come from its rise in value or the portion you have already paid towards the loan.
For example, if you have a $420,000 mortgage on a $700,000 property, you could have $300,000 worth of equity and an LVR (loan-to-value-ratio) of 60%.
By taking $140,000 from this equity, you can raise your loan-to-value ratio to 80% and put the funds towards a deposit for an investment property.
Although this is less than the total equity you have available, taking out more than this would raise your LVR to over 80%, making you liable for the added cost of Lenders Mortgage Insurance (LMI).
Pros: Why refinancing to invest could be a good idea
Refinancing to invest in property can be a good idea (depending on your situation) because it means you can put your investment property up for rent, allowing you to funnel the costs into paying off the new mortgage, all while building your portfolio.
Cons: Things to consider before you start
- Can’t secure tenants: Be careful about where you choose to invest. If you buy in an oversaturated rental market, you might find it difficult to secure tenants, meaning you’ll be forced to find the cash to cover both mortgages without the assistance of rental payments.
To avoid this, make sure to check the predicated rental yield before buying, as well as to look at what sort of infrastructure projects are happening in the area that might attract tenants. A simple Google search for properties available to rent in the area can also prove fruitful when gauging demand.
- Refinancing costs: Depending on your current mortgage conditions, you might run into costs when trying to refinance your mortgage. In many cases, home loans will have closing, break or discharge fees (usually a maximum of a few hundred dollars).
Another thing to keep in mind is that if you try to access too much equity your LVR could rise to above 80%, making you liable for lenders mortgage insurance which can be in the thousands.
- Bad tenants: When renting out a property, there’s every chance you will run into bad tenants. If for some reason your tenants refuse to pay rent for a period your cash flow will be interrupted, meaning you might not be able to meet your mortgage repayments. The services of a property manager can help you to avoid such hiccups.
- Investment loses value: If your investment begins to drop in value it will be harder for you to build equity, potentially affecting your financial position.
To help avoid this it’s important to ensure you do appropriate market research and seek services that offer property reports.
Before investing checklist
- Check suburb/property reports: To help avoid investing in a home that could depreciate, aim to look at suburb and property reports.
eChoice home loan consultants can offer property reports to potential home loan customers while discussing home loan options.
- Seek professional advice: Before diving into the deep end of such a huge financial decision, it’s important to seek professional advice. By talking to a professional – such as a financial advisor – you will be able to better determine whether refinancing to invest is a wise decision for your circumstances.
- Decide what are you are looking for: Decide what kind of property you are looking to invest in. Does it have to be close to home? Residential or commercial? Will it be a house or an apartment? All these things, along with its location, could impact its ability to gain value.
Words by Kathryn Lee
On the lookout for your next investment? Contact eChoice. Our brokers have access to 100s of home loan products from over 25 different lenders, giving you the best chance of finding the perfect home loan deal.