If you’re looking to buy an investment property and have equity in your own home, refinancing your home loan could be the best way to fund your purchase.
In this article we’ll explain how this may work for you.
Why refinance your existing home loan?
Usually, when you take out a home loan to buy any property, you also need to have a deposit. This will generally be 20 per cent but could be as low as 5 per cent if you take out lenders mortgage insurance. By refinancing your existing home loan, you may be able to avoid having to save this deposit.
That’s because a lender may let you use the equity in your home in place of a deposit. For instance, if your home is worth $1,000,000 and you owe $425,000 on your home loan, you have $575,000 of equity. A lender may let you use a portion of this as security against your investment property.
To help with being able to afford loan repayments with a new investment property, a home loan refinance may also help you consolidate personal debts to get your overall monthly commitments down.
How much of your equity can you use when you refinance?
When you refinance you can generally borrow up to 80 per cent of the value of your home and sometimes up to 95 per cent, with LMI. That means in the above scenario, a lender may let you use $375,000 towards the purchase of your new home, even without LMI. That’s calculated as 80% of your total loan ($800,000), minus the balance owed ($425,000).
This $375,000, in turn, could be used towards the purchase of an investment property.
That said, if you’re refinancing to buy an investment property, you should also consider the tax implications of how you structure any loan. For instance, if you use your existing home as security and place both properties on the one loan, you may miss out on the chance to take advantage of tax deductions.
Weighing up the cost of refinancing to buy an investment property
There are often costs associated with switching loans to refinance. This may include an establishment fee for the new loan, as well as discharge fees for your existing loan. If you have a fixed rate loan, this may even include break costs on your loan.
Keep in mind that you’ll also have to pay stamp duty, legal fees and other costs on your new property. You’ll also be up for ongoing costs such as council and water rates, property maintenance fees and potentially land tax.
One of the main reasons people generally buy an investment property is for the rental income. But it’s important to keep in mind that there may be periods where your investment property is vacant.
For that reason, you should always make sure you have a buffer to cover the possibility that you won’t receive income for a few months or so.
And before you buy, check in with a local real estate agent on how much rent you can expect to receive, and what the property management costs may be.
So how do I research what a home loan refinance can do?
When you refinance your home loan to buy an investment property you’ll have the choice of staying with your existing lender or switching to a new lender altogether.
So it’s a great time to get a lending specialist on side and understand what options you have. With investing, the right lending structure for your tax may also be important and a lending specialist can work in with you and your accountant, if need be.
LJ Hooker Home Loans lending specialists fully understand property lending. They can also work in with LJ Hooker property management and sales teams to help you research, buy, fund, and easily manage your investment property.
For a free review of your investment buying potential speak with us today.
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This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.