Is Refinancing Your Investment Property a Smart Move?
Refinancing could help you to lower your monthly mortgage payments and maximize the return on interest from your investment property.
However, while there are pros to refinancing, there are also cons. Here, we explain all the details to provide a balanced view.
Are you considering refinancing your investment property, but aren’t sure if it’s the right move? Let’s discuss the pros and cons to help you make a decision.
What Will Refinanced Interest Rates Be Like?
Mortgage rates will be higher when you refinance an investment property than they would be for your own home. This is because lenders put investment property loans in a higher risk bracket than owner-occupier loans, and their interest rates reflect this.
And if you’re shooting for an interest-only mortgage, the rates are likely to be much higher than one where you’re repaying principal and interest each month.
If refinancing means taking on a much higher rate of interest than your property is currently held on, it may not be the best approach for you.
What About the Fees?
When refinancing, remember to take into account any fees and charges paid to the lender for setting up or administering its mortgage product.
If you’re moving lenders and not just switching to a new loan, you also have to consider any valuation fees and lawyers’ fees on top of your lender’s costs. This can tally up to an extra 11% of the purchase price.
If the fees add up to a lot, and you’re making minimal savings after refinancing, you may decide that it’s simply not worth the hassle.
Taking Advantage of a Good Loan-To-Value Ratio
If you’ve owned your investment property for some time, you should have built up a fair share of equity against your loan.
The amount you still owe, divided by the amount you originally borrowed, gives you a ‘loan-to-value’ ratio. When this ratio is relatively low, for example below 60%, lenders are willing to give you better rates.
This is because there is less risk involved for the lender. If it needed to repossess a property where the owner held a large portion of the equity, it could recoup far more money if the customer was no longer able to pay.
If you have a low loan-to-value ratio, it’s definitely worth checking the rates on the market right now to see if you could switch to a lower rate.
However, down the scale there comes a point where the rates level out – and don’t get any cheaper regardless of how little you owe in comparison to the value of your home.
Finding a Lender and Getting the Best Deal
You are generally likely to find it harder to get a lender for your investment property than an owner-occupied property.
However, if you’re refinancing then you may be able to reach a new agreement with your current lender. Many lenders will be happy to at least talk you through what they can do for you, as they don’t want to lose your custom.
But even if your current lender is happy to renegotiate your terms, you should still take the time to see what else is out there.
Maximizing your investment return relies on many factors, but a good mortgage rate is key for a successful investment property. Shopping around is vital if you want to get the best deal – don’t just take your bank’s word for it.
Can I Change the Length of My Mortgage?
It’s plausible that refinancing will allow you to extend the length of time you hold a mortgage for your investment property. This could potentially reduce your monthly costs. However, you would pay more in total over the lifetime of the mortgage.
Conversely, you might also be looking at switching to a shorter term loan. Some lenders offer mortgage terms of as little as 15 years, which could potentially save you thousands of dollars.
However, if you run up against a cash flow problem, you could be hard-pressed to meet the monthly repayments. These will be much higher than a 25- or 30-year loan.
So bear in mind that instead of shortening your mortgage term, you could consider making regular overpayments instead. This way, you retain the flexibility of a longer term while working towards paying your loan off earlier.
Be aware that your lender may charge you for making early repayments – calculate how much extra you’ll pay and ensure the charges aren’t too punitive first.
What Do I to Prepare in Order to Refinance?
Typically, lenders will want to see a number of documents about you when you take out a mortgage.
As a starting point, you should gather some important documents together. The list below is not exhaustive, and your lender may ask to see more details.
They are generally more strict with their criteria for investors than for owner-occupiers, so be prepared to be asked for a lot.
You’ll need to show your lender things like your passport, credit card statements, full employment history, and proof of your income – for example, your payslips.
They may also ask to see a copy of your insurance policy for the property, as well as a letter from any agent you’re using, confirming the rental income. Since you’re refinancing, they may also ask to see proof that you’re the property owner.
Where Can I Get More Advice on Refinancing My Investment Property?
You may need a guiding hand through the refinancing procedure. Vystal provides our clients with supportive and experienced investment advice, which takes a multi-disciplinary view of all portfolios – large or small.
Contact us for a free initial consultation, where we’ll identify your needs and start building the solid foundations for the future of your investment property.