Refinance Your Investment Loan

When you refinance your investment loan, it can help you unlock equity to grow your portfolio, secure a lower interest rate, and even minimize your taxes. Optimising your loan structure also helps you improve your cash flow and overall Return On Investment.

In this article, we are going to provide you a detailed rundown on how you can refinance your investment loan.

Am I Eligible To Refinance My Investment Loan?

To be eligible to refinance an investment loan, you generally need at least 20% equity in your property to avoid Lenders Mortgage Insurance (LMI). Lenders will also assess your borrowing power, credit history, and rental yield to ensure you can comfortably service the new debt.

How Do Lenders Assess Borrowing Power and Rental Income?

When calculating your borrowing power, banks look closely at your Debt-to-Income (DTI) ratio and your current rental yield. Lenders usually take 70% to 80% of your rental income into account to provide a buffer for market fluctuations or vacancy periods. Furthermore, they will factor in existing debt to ensure the new loan structure aligns with your financial capacity.

What Are the Minimum Equity and LVR Requirements?

The Loan-to-Value Ratio (LVR) measures how much you owe against the property’s value. You must generally owe less than 80% of the property value to refinance without penalty. If your LVR is above 80%, you will be required to pay Lenders Mortgage Insurance (LMI), which can cut into your investment profits.

How To Refinance An Investment Loan?

Refinancing an investment property involves a straightforward process. You need to assess your current equity, compare the market for better rates, prepare strict financial documentation, and apply for your new loan facility.

Value Your Property: Start by getting a realistic estimate of your property’s current market value to determine your usable equity and LVR.

Compare Lenders and Rates: Look for lenders offering lower rates or better loan features. Even a 0.30% to 0.60% rate reduction can save you thousands over the life of the loan.

Prepare Your Documentation: Gather your financial evidence. Self-employed and PAYG investors need to provide recent payslips, tax returns, and current rental statements.

Apply and Settle: Submit your application. Once approved, your new lender will pay off the old mortgage and manage the settlement process. Average turnaround times are typically 3 to 4 weeks.

Disclaimer: By submitting this form, you consent to receive emails from Home Loan Experts, including your requested guide, home loan tips, updates and occasional promotional offers. You can unsubscribe at any time. View our Privacy Policy

Structuring Your Investment Loan for Success

The right loan structure protects your personal assets and maximizes your investment returns. Investors must carefully align their repayment types, interest rate structures, and offset accounts with their long-term financial goals.

Should I Choose a Fixed or Variable Rate?

Choosing between a fixed or variable rate depends on your need for cash flow certainty versus flexibility. A fixed rate provides exact repayment predictability, shielding you from sudden rate hikes. In contrast, a variable rate offers the flexibility to use an offset account and make extra repayments without penalty.

Should I Refinance to Interest-Only (IO) Payments?

Interest-Only (IO) payments are highly popular among investors because they minimize monthly cash outflow and maximize tax-deductible interest. However, while IO improves short-term cash flow, it does not reduce the principal debt. Principal & Interest (P&I) loans demand higher monthly payments but actively build your equity over time.

Keeping Offset Accounts Separate for Tax Purposes

An offset account is a transaction account linked to your mortgage that reduces the balance on which interest is charged. According to the Australian Taxation Office (ATO), you must keep a clear paper trail for investment deductions. For tax purposes, you are typically better off keeping investment offset funds completely separate from your personal owner-occupier accounts to easily claim negative gearing benefits.

Should I Cross-Securitize or Keep Loans Separate?

Cross-collateralisation is when you use the equity in one property (like your family home) to secure a loan for an investment property. While convenient, it increases your risk. If the market drops, the bank controls both properties.

Keeping your loans standalone (un-crossed) protects your home from a forced sale and makes it much easier to refinance individual properties in the future.

Tax Implications And Costs Of Refinancing

Refinancing an investment property incurs specific costs, such as discharge fees, application fees, and valuation fees. Fortunately, according to the ATO, the majority of borrowing expenses associated with an income-producing asset are tax-deductible.

Are Refinancing Costs Tax Deductible?

Yes, the costs of moving from one lender to another for an investment property are generally tax-deductible. These borrowing expenses can often be claimed over five years, or over the life of the loan, whichever is shorter. It is essential to speak with an experienced accountant to ensure you claim these correctly.

Capitalizing on Negative Gearing

When your borrowing costs and property expenses exceed your rental income, you are in a negatively geared position. Refinancing to a structure with higher ongoing fees or switching to Interest-Only can sometimes be leveraged to optimize your negative gearing benefits, reducing your overall taxable income.

Ready To Start Saving On Your Investment Mortgage?

Backed by industry-leading experts, our simple process makes transferring to a new lender a breeze. We’ll take care of the hard work for you.

Call us on 1300 889 743 or complete our free online assessment form to get started today.