Refinancing is a very powerful tool for property investors as it provides a means to access the equity in a property to use in order to invest elsewhere.
If your goal is to build a large portfolio, arguably the most important part of the process is your ability to obtain finance and refinance when required.
Not sure how to refinance in an effective way? To help you, here are the do's and don'ts of refinancing.
Consider Refinancing When Markets are Strong
When markets are strong it can be a great time to look to refinancing, given that there has likely been house price growth which means your equity (property value minus debt) has also increased
Refinancing can be particularly valuable if you’ve seen very strong comparable sales in the same area as your current property. Keep a close eye on the current market and if properties of the same type, size, age and land component sell well, then it might be worth talking to a mortgage broker about how you can capitalise on those recent sales.
A lender will order a valuation prior to approving a new loan and they will likely be using these recent sales as a benchmark to price your property.
Generally speaking, home loans attract some of the lowest interest rates of any kind of loan. That’s because property is seen as a very low risk investment in the eyes of banks and lenders along with loans are secured by the property itself.
When refinancing, it can be a good idea to consider rolling some of your other higher interest debts, such as personal loans, credit card debts or even car loans into your mortgage.
This way, you’re able to reduce your overall weekly repayments. The added benefit of doing this for property investors is that this will potentially increase your borrowing capacity as you have less money being put towards paying off current debt.
Get an Offset Account
An offset account has many advantages but the main role is to save interest. Effectively, you’re not paying any interest on funds that are sitting in your offset account.
This can be extremely useful as a money management strategy, whereby you pay bills and living expenses on something like a credit card and leave those funds in your offset account saving interest.
By doing this you’re effectively allowing your credit card company to pay off your interest.
Speak to an Expert
With so many lenders and even more home loan products, it’s important to speak to an expert who will be able to fit your personal situation with the correct product.
In recent years, property investors have had to get increasingly savvy about how they build and structure their property portfolio, because of things like debt-to-income ratios and serviceability buffers adding another layer of restrictions
Use an expert like a mortgage broker to help plan out your strategy from a lending perspective. There’s no point buying one property right now that will limit your ability to invest for the next decade because it ties up all your borrowing capacity.
While it’s tempting to chase the low interest rate deals or even bonuses that might come with taking out a certain loan, more often than not these deals are not worth it in the long run.
Either these loans revert to more standard interest rates, or they could have other fees attached to them if you wanted to exit the loan. Once again, you need to be speaking to an expert and taking on loans that help you achieve your long-term goals, not being tempted by short term incentives.
Unnecessarily Fix Your Interest Rate
In the current interest rate environment, there is the belief that interest rates can only go one way, which is higher.
The issue with fixing interest rates is that the banks and lenders will invariably have already priced in any moves that are on the horizon. That’s why a fixed rate loan might come with a far higher interest rate than a variable rate.
If you do want to fix your rate, consider fixing a portion, but take advice from a mortgage broker as to what might be most suitable for your situation.
There are also often significant exit fees that come with fixed interest rate loans making them far less far flexibility than a variable rate loan.
Go Straight to a Lender
It’s important to know, that every time you apply to a lender, it impacts your credit rating. If you are going straight to a lender and apply for a loan with them, your credit rating will get hit regardless of the outcome.
Mortgage brokers can be very important here as they have relationships with lenders and can get an indication as to your odds of success, well before you actually apply.
Protecting your credit rating is important as a property investor as this will allow you to continue to get finance moving forward which you’ll certainly need if you want to build your property portfolio.