If you’ve been paying off your home loan for a while, chances are you’ve gained some equity in your home. Between being ahead on repayments, and property price performance, this could be a sizeable amount of money to access used to purchase another property. A suitable way to do this could be to refinance your home loan and access that equity.
Before jumping in, there’s a few things to be mindful of before refinancing your home loan for the purchase of an investment property.
Refinancing is simply changing your home loan around, either to a new lender, or staying with the same one but with a new (hopefully better) interest rate and home loan product. Refinancing generally requires there to be at least 20% equity in the home, unless you feel like paying lenders mortgage insurance (LMI) again. However, in the context of using it to buy an investment property, refinancing can be a handy tool to ‘unlock’ equity in your property. But how?
Equity is essentially the value of the home, minus how much you still owe your lender. The value includes both how much you’ve paid into the loan, as well as how much your home has appreciated in value since you first bought the home.
In many cities - particularly Sydney - property price performance has been strong, which is a good thing if you want to unlock equity. Chances are you could have a lot more ‘equity’ than first thought. Refinancing in this fashion allows you to tap into that equity and use it for something else… like buying a new home.
If you’ve been paying off your home loan, saving up for a deposit for another home loan is not an easy task. Luckily, your existing home can be a powerful tool. Lenders will usually allow you to treat your existing home’s equity as a deposit for buying the next one. For example, if you have a $700,000 house, and you have $300,000 in equity (money paid into the loan, plus capital gains), you can likely use all or most of that for your next purchase. In this scenario, $300,000 is quite a large ‘deposit’.
Get a foot on the investment property ladder: It’s a dream of many to buy an investment property, because bricks and mortar in Australia has been seen as a fairly ‘stable’ investment.
Saves time saving for a deposit: Rather than pile money into a savings account for an investment property in a low-interest environment, unlocking equity through refinancing to buy an investment property can be thought of as a ‘time saving’ device.
A lower rate through refinancing: If your existing home loan is more than a few years old, you’re probably paying too much in interest. Refinancing allows you to access a new low rate, while also unlocking equity. Two birds, one stone.
Diversify your investments: Diversity in your investment portfolio, whether that’s shares, property or something else, can be the key to riding out market volatility - diversifying the areas in which you buy a property can provide more stability.
Affordability: Don’t forget that now you’re going to be dealing with two home loans - one on your owner occupied home, and another on your investment property. This is where using a mortgage calculator can be useful to determine if you can actually afford the two home loans.
Market risks: Property price gains are not guaranteed, yet can be quite important in building equity. There is always a chance the market could dip a little, and you’re left paying two home loans on properties worth less than what you bought them for.
General Investment property considerations: There’s general investment property considerations too, including bringing in tenants, whether your property is negatively or positively geared, costs of maintenance and body corporate fees if any, and real estate/property management fees. You’ll also have to pay stamp duty and other government costs on your investment property.
Fees: Refinancing from your old lender might not be free - fees could include discharge fees from your old lender, and establishment fees with your new lender.
If you’ve decided that refinancing to buy an investment property sounds like a good idea, then now comes the time for research. You’ll have to decide first if you can afford two home loans, as well as how much equity you have built up in your existing home. Then, with the investment property, you’ll have to decide on which type of property to buy - apartment, townhouse, or a house, as well as which suburb or town you’re actually going to buy.
If you’re ready to refinance to fund an investment property, speak with one of our lending specialists today to get started on your home buying journey.