Promoted by loans.com.au
Refinancing your investment property is a strategic move that can improve cash flow, unlock equity, and position your portfolio for success. But, as with most things in investing, timing is important.
If you're not sold on this strategy or want to know how to go about it, here's why refinancing should be on every property investor's radar and how to know when it's the right time.
Lower Your Interest Rate
Refinancing during a low interest rate environment, or when rates are falling, allows investors to lock in a more favourable interest rate that can translate into significant savings over the life of the loan.
For example, refinancing from a 6.5% p.a. interest rate to 5.5% p.a. on a $500,000 investment loan could save you over $3,000 a year in interest repayments alone - freeing up capital for reinvestment or an emergency buffer.
However, don't just wait for opportunities. Make sure you are being proactive as well.
Always review your loan every two years to make sure you are getting a good deal. And if your property has increased in value, it may improve your loan-to-value ratio (LVR) and eligibility for better rates.
Talk to your lender and stay updated with the latest news and rate changes. There is no need to pay a high interest rate when lower and more competitive ones are available.
Boost Your Cash Flow
For investors, cash flow is king. Refinancing can help reduce your monthly repayments. However, it goes beyond that.
Freeing up funds month-to-month helps you build a buffer for maintenance or vacancies and ease financial pressure if your property is negatively geared (when expenses exceed rental income).
However, before contacting your lender, assess how refinancing could influence your rental income strategy, tax deductions, and long-term asset management.
Consider the impact of interest reductions on your overall gearing strategy, and whether your long-term plan focuses on cash flow, capital growth, or a balance of both.
If you're…
- Positively geared (you're rental income exceeds expenses) - this may be easier to achieve if interest repayments fall after you refinance.
- Negatively geared (you're aiming for a break-even position with capital growth potential) - refinancing to a lower rate could reduce the size of interest expense you can deduct from your taxable income.
Overall, it's essential to weigh the cash flow improvement against the potential tax offset reduction. Better yet, consult a property-savvy accountant to run the numbers.
Sometimes, improved cash flow is more valuable than tax deductions, especially if you're planning to reinvest or increase borrowing power.
Tap into Equity to Grow Your Portfolio
One major benefit of refinancing is the ability to access equity without selling the asset, and therefore defer triggering capital gains tax (CGT).
Rather than offloading a well-performing property to fund a deposit for your next investment, you can refinance and release equity to reinvest.
Say, you purchased an investment property for $500,000 and it's now worth $750,000. Selling could attract tens of thousands in CGT. However, if you refinance up to 80% LVR, you could access approximately $100,000 in equity tax-free (assuming existing debt is around $500k), without having to sell.
Equity release is a powerful compounding strategy - but, and this is important, the new debt must be used for investment purposes to retain tax deductibility on the additional interest.
Reassess Your Loan to Match Your Goals
Your current loan might not suit your strategy anymore. Refinancing lets you change your loan structure to better match your needs and goals.
First, refinancing lets you switch from variable to fixed (or vice versa). You can choose which rate structure is more suitable, depending on the interest rate outlook.
You can also change your loan terms, such as extending the term to reduce repayments or shortening it to pay off the loan faster.
Refinancing also enables property investors to access features, like offset accounts, or switch lenders with better investor servicing.
The Bottom Line
Whether you're a seasoned investor or just getting started, recognise that refinancing is a smart tool in any property investor's toolkit. Regularly reviewing your loan can help you stay ahead of the market and avoid getting stuck with outdated or uncompetitive rates.
However, remember that refinancing amidst falling rates should be part of a broader investment strategy - not a knee-jerk reaction to rate cuts.
Conduct a full financial review, model best- and worst-case cash flow scenarios, and align your loan structure with your medium- and long-term goals.
When Should You Refinance?
You might consider refinancing if:
- Your interest rate is more than 0.5% higher than the current market offers
- Your property has appreciated significantly
- Your financial goals or investment strategy have changed
- Your loan is nearing the end of a fixed-rate term
What to Watch Out For
While the benefits of refinancing can be compelling, it's important to weigh up:
- Break fees on fixed-rate loans
- Loan application and property valuation costs
- Tax implications, especially if accessing equity
- Changes in serviceability assessments may affect your ability to refinance
Thinking about refinancing your investment loan? loans.com.au offers a range of investor loans that may suit your needs. Explore your refinancing options online or speak with their team of lending specialists to see if it could be the right move for your property strategy.
Image by Katrin Bolovtsova
