Refinancing your investment property can be a strategic move to enhance your financial position. Whether you’re aiming to lower your interest rates or cash out equity for further investments, understanding the proper timing and process is essential. This guide provides you with an overview of when and how to refinance your investment property to achieve your desired outcomes.
Strategic Timing for Refinancing
Below are some of the best times to refinance your investment property, and why:
- When Market Rates are Low: Keep an eye on interest rate trends, and be alert when rates decrease. As market rates drop, securing a mortgage with a significantly reduced interest rate can lower your monthly payments, ultimately reducing the total cost of your loan over its lifetime.
- When There Are More Competitive Loan Offers Available: Regularly review your existing loan against current market offers. If you notice that the terms offered by other lenders are better than your current deal – be it lower interest rates, fewer fees, or more favourable loan features – it’s wise to consider refinancing. This move can reduce your financial burden and enhance your investment’s profitability.
- When Your Equity Grows: If the value of your property increases and your mortgage balance decreases, your equity also increases. This growth in equity not only boosts your asset’s worth but also provides you with an opportunity to refinance and access additional funds at potentially lower interest rates. You can reinvest these funds into property improvements, further real estate acquisitions, or diversified investments, effectively enabling you to expand your portfolio and increase your wealth.
- When Your Fixed-Rate Period Ends: As your fixed-rate term nears its end, this phase can be the perfect time to reevaluate your mortgage options and refinance to a variable-rate or another fixed-rate loan. By doing so, you could potentially secure a more favourable deal with lower interest costs.
- When Your Loan Rate Nears Adjustment: If your current loan’s rate is about to adjust, especially if you’re transitioning from a fixed-rate to a variable-rate period, which might expose you to higher interest costs, it’s a critical moment to consider refinancing. Refinancing during this window allows you to lock in a new rate, potentially lower, which can stabilise your financial planning and possibly reduce your monthly payments.
- When Your Credit Score Improves: Refinancing when your credit score increases can significantly enhance your borrowing power by qualifying you for lower interest rates and better loan terms from lenders. This improvement could translate into substantial savings on your mortgage payments and potentially provide you with better loan options, helping you maximise the financial performance of your investment.
- When Your Financial Goals Change: If your investment goals or personal circumstances have changed, it may be an ideal time to refinance your investment property. This way, you can align your mortgage terms with your current financial objectives, potentially lower your interest rates, and access better loan features that meet your new priorities.
Steps to Refinance Your Investment Property
Once you’ve decided to refinance your investment property, follow these steps to enhance your financial benefits and help you accomplish your investment goals:
1. Evaluate Your Needs and Goals
Clearly define what you aim to achieve with refinancing, whether you’re looking to reduce your monthly payments, shorten your loan term, or cash out equity for investment.
2. Check Your Equity and Credit
Before proceeding, confirm that you have sufficient equity in your property to justify refinancing. A professional property valuation is necessary to determine your current property value, which, along with your outstanding mortgage balance, will help calculate your equity percentage. Typically, you need at least 20% equity to avoid additional costs like Lenders Mortgage Insurance (LMI). Also, maintain a healthy credit score, as it impacts your eligibility and the rates you can secure.
3. Compare Loan Options
Research and compare different mortgage products and lenders. Look for lower interest rates, better terms, or specific features like offset accounts or redraw facilities.
4. Calculate Costs vs. Benefits
Include all potential refinancing costs, such as application fees, discharge fees, and break costs, if applicable. Weigh these against the benefits you expect from refinancing to ensure it’s financially worthwhile.
5. Prepare Documentation
Gather the necessary documents, including proof of income, property valuation, and current mortgage details. These will be required by your new lender to process your refinancing application.
6. Apply and Transition
Once you’ve selected a lender and a loan product, submit your application. After approval, coordinate with your current and new lenders for a smooth transition process.
Final Thoughts
Refinancing your investment property offers an excellent opportunity to adjust your financial strategy according to your current circumstances and goals. However, make sure to know the best times to refinance and follow a clear process, so you can maximise the benefits of refinancing.
If you need tailored guidance with refinancing your investment property, don’t hesitate to reach out to a professional mortgage advisor to help you navigate this process effectively.
