Refinancing to buy an investment property

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June 09 2020
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Are you planning to buy an investment property but have no clue how to do it?

Refinancing to buy an investment property

While buying an investment property is a good financial opportunity, scraping together the money for a deposit and associated holding costs can be rather difficult, especially if you are also paying off a mortgage. In this situation, refinancing your home loan could be the best way to fund your purchase.

Many people have chosen to refinance their mortgage to buy an investment property due to its financial benefits. If you ultimately choose to rent out your investment property, you can benefit from the rental income and potential capital gain, which can help you repay your home loan or invest in other assets.

Here is a guide on how you can refinance your existing home loan to purchase an investment property.

Why should you refinance your existing home loan?

Refinancing refers to the process of taking out a new loan to pay off your existing loan.

Refinancing is one way to help you buy an investment property. The process involves refinancing your existing mortgage and getting access to your equity to use it as a deposit to buy an investment property.

A deposit is usually required when you take out a home loan to purchase any property. Generally, the rate will be at 20 per cent, but it can also be as low as 5 per cent. If you refinance your existing home loan, you can avoid having to save for this deposit. Most lenders allow you to use the equity in your house as a replacement for your deposit.

Refinancing your home loan to finance your investment property purchase may also allow you to consolidate your debt and lower your financial liabilities.

To learn more about the advantages of refinancing, read here.

The risks of refinancing to invest in a property

Refinancing to have more funds for your investment property can be a good strategy for borrowers. But make sure that you also know the risks associated with it.

Here are some of the risks you need to consider before refinancing your mortgage to buy an investment property:

Market risks. If you choose to rent out your property, you will most likely rely on your rental income to repay your debt. You may not get a substantial income to cover your repayments if your property is situated in a place that has a slow rental price growth or there is not enough demand for it. To prevent this, do your research to ensure that there will be enough demand for your property type. If you are planning to invest in a developing location, see what infrastructure projects are coming up that can help you determine if there will be potential renters in the area.

Refinancing expenses. Finding another lender and refinancing your home loan can be an expensive undertaking. Before you decide to refinance, you need to have an estimate of the total costs involved in the process. You can consult with an accountant and a mortgage broker to get a detailed breakdown of the costs you will incur from exiting your existing home loan. These fees include discharge and government fees. You should also be aware of the expenses associated with setting up a new home loan.

Depreciation in property value. There’s a chance you may find yourself in a worse financial situation if the property falls in value, as it will prevent you from building up further equity. To minimise this risk, make sure that you diligently research the property market. This will help you buy in a location that has potential for capital gain over time.

Unstable rental income. Owning a rental investment property is a great opportunity to earn rental income that you can use to pay off your loan or invest. But having problematic tenants that refuse to pay rent or don’t pay on time can result in financial problems. There are also instances that a tenant would abruptly leave the property without settling their balances. This would mean facing periods where you have no income and you will need to dip into your savings to cover repayments until payment resumes or until you can find a new tenant. You can lower this risk with the help of a property manager who can help you get your property rented by people with a good track record of being a tenant.

Conclusion

If you are planning to buy an investment property, refinancing your home loan may be the best strategy to fund your purchase. However, be mindful about the risks associated with buying an investment property through this process and make sure that you seek professional advice and do your research before taking the next steps.

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