With its ability to provide passive income and prepare investors for a comfortable financial future, real estate investing is a strategy used by hundreds of thousands of Australians to build wealth.
Many of these investors live on loans taken years ago that could cost them much more than they need.
Organizing a mortgage is not a "take and forget" exercise; investors should return to their site every 12 months to make sure they do not pay too much and that the loan always meets their needs.
It is here that the refinancing comes in. It is a process of transferring an existing loan to another lender, usually for one of the following reasons: take advantage of a lower interest rate; access better loan conditions, such as compensation or redrawing; extend a loan for a longer period; or to access a new period of interest only.
Whatever your motivation, when you refinance, you usually have more money in your pockets, whether it's paying off a mortgage or buying a new investment.
"Cash flow is one of the main benefits of refinancing, in addition to simply recovering funds from banks by ensuring that you pay the least possible interest," says Graeme Salt , managing partner of Chan & Naylor Finance.
"Imagine that someone who has 20 years of mortgage refinance a new loan of 30 years – he must then spread his repayments over a longer period and at a lower rate. This then frees up money to do other things. "
While loan applications can be complicated when refinancing, Salt notes that buyers are currently able to save a good amount of money, banks are starting to offer products. and more competitive investor rates
The lifting by APRA of interest-only restrictions also presents excellent opportunities for borrowers.
"There are some excellent price opportunities. Over the last 12 to 24 months, all lenders have increased their rates, but they are reviewing them and [borrowers] that meet all criteria can benefit up to 1% and more. I would say it's really worth it, "said Intuitive Finance Executive Director Andrew Mirams.
At the same time, Nancy Youssef, founder of Classic Finance, adds that a loan in principal and interest can facilitate the constitution of equity, but that it has consequences on the affordability for investors, especially those with larger portfolios spread among different lenders. With the warming of the lenders market, there is one aspect that refinancing can take advantage of.
"Many banks and lenders currently offer cash rebates to attract new borrowers. If you give all your loans to a single lender, they may be a little more motivated to offer you a better interest rate, "she says.
Potential Pitfalls
This is not to say that refinancing is a surefire solution, especially in the current state of the market.
"More and more lenders could offer a competitive rate for a P & I loan, but set the price of the product at interest only 0.5% to 1% higher for the same customer – which can pressure on cash flow, "says Youssef.
"Lenders also put pressure on valuation rates and ease of maintenance because they now account for all kinds of lifestyle expenses they were not previously in."
For this reason, the results of real estate valuations are even more crucial for a borrower because the investor's stock position may not be as strong as they thought after the return of the valuation.
"The biggest risk of refinancing is not knowing what you want from the refinancing process, to fool yourself and having a mark on your credit report," said Mirams.
Moral of history? If you are considering refinancing, make sure you have a clear idea of ​​what you are trying to achieve and, most importantly, what you plan to do with the savings.
Smart Refinancing
When refinancing, proper preparation and knowledge of the right lenders are the key.
"Investors need skills to negotiate the right outcome with the right lender," says Mirams.
"Be prepared, know your position, your expenses and know what you want to achieve, whether it's another purchase, only interest conditions or the best rate."
Graeme Salt also notes that when they apply to refinance a loan, banks review up to three months of bank statements to assess a borrower's commitment to repay the loan. . Buyers must therefore have a solid financial edge.
"Long before applying for financing, borrowers must have a good credit history, such as credit cards and utility bills," says Salt
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That's why working with a professional and experienced mortgage broker can help you find the right loan.
"We hear horror stories about millions of interest-only loans that need refinancing – and it's certainly harder to do it than five years ago . But there are many non-compliant lenders that go through brokers, "says Salt.
"Good mortgage brokers have long-term relationships with borrowers so they can make sure the borrower is well prepared."
Brokers also have the benefit of having in-depth knowledge of ideal rates and policies for an investor, which saves investors from trial and error and, in doing so, hurts their credit status. .
"It can be a labyrinth. It's very confusing for consumers. If you shop too much, you risk damaging your credit report. Many people will try their luck and just go to their own bank, but they may not be suitable, "says Youssef.
"A mortgage broker can give you tailor-made advice and guide you to lenders with better policies or rates tailored to your circumstances"
Case Study: "We Saved $ 400 a Month"
Cassie and Dean Raine of Pimpama, on the Gold Coast, had held the loan on their investment property for six years and had not even considered refinancing before a chance conversation with a friend. "We were discussing the high cost of health insurance when my friend said that she had reviewed all her bills, insurance and debts and contacted all the suppliers to negotiate a better deal, or she went to a other. Said Cassie. "She said she saved almost $ 8,000 a year on her mortgage by refinancing her home loan, which led us to think that we should check our mortgages on our home and our rental properties to see what our options were."
After talking to a mortgage broker, they understood that they could restructure their finances to better meet their needs.
The balance of the investment loan amounted to $ 289,000 and was secured against a townhouse for which the couple had paid $ 365,000. The principal and interest loan was a variable rate of 4.25%. Once Cassie and Dean spoke to a mortgage broker, they understood that they could restructure their finances to better meet their needs. "This is our first investment. So we did not understand the tax benefits of keeping the investment loan only in interest so that we could pay off our mortgage as soon as possible, "explains Cassie. "We ended up being able to refinance our investment loan into a brand new 3.89% single interest loan, which significantly reduced repayments – by almost $ 400 a month!" The pair chose not to refinance his own personal home loan, as the LVR was above 80% and they did not want to pay the lenders and the mortgage insurance. However, the couple uses the savings to date and puts them into their personal mortgage to accelerate the payment of this non-deductible debt to refinance their own home loan in 12 months.
