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Investors looking to build a property portfolio should constantly be looking at ways to increase their cash flow and reduce expenses. Despite changes to investor loans, interest rates are still low, which means now could be a good time to reassess your mortgage and consider refinancing your investments.
Blogger: Frank Valentic, director, Advantage Property Consulting
Many investors think that once a mortgage is locked in, there’s little room to move. In actual fact, you can always negotiate with your broker or bank, or potentially even switch mortgages.
The benefits are worth it. For instance, if you had a $500,000 mortgage and reduced the interest rate by just one percentage point, over 30 years you could save $100,000 in interest repayments. To put things in perspective, that’s enough for a deposit on your next investment property!
Here are four benefits of refinancing your mortgage:
1. You can secure a better interest rate
If you purchased your investment a number of years ago and locked in a fixed-rate mortgage, then it’s likely there are better options available given interest rates have reached record lows in the past year. So if your term is coming to an end, it’s a good time to lock in a new rate. Some lenders are offering one-year terms from 3.33 per cent, so shop around and find something that suits your long-term property goals.
Alternatively, if you’re currently on a variable rate, consider changing over to a fixed rate. While the RBA has continued to push rates lower and lower this year, a survey of experts conducted by finder.com.au showed that 56 per cent are forecasting the cash rate will start rising in 2016. Therefore if you are concerned about rate increases, speak to a financial adviser who can help you come to the decision as to whether switching to a fixed rate is right for you.
2. You can gain extra features such as off-set accounts
Many loans now come with extra features such as flexible repayments, offset accounts, account splitting or the ability to redraw. If your current loan doesn’t offer these add-ons and you see the need for them in the future, then changing loans might be a good idea.
Take offset home loan accounts for example, which can give you greater flexibility and help reduce your costs. Basically, any funds deposited into this account, such as salary or income from elsewhere, may offset the loan balance so you pay less interest – whilst still letting you have easy access to your money. If you foresee an increase in your salary and wish to cut down the interest on your loan, then this could be a good option for you.
3. You can access equity to renovate your property
Renovating your investment property is a great way to fast-track capital growth on your property. A newly renovated home also has much more appeal for renters and can enable you to increase your weekly rent. However, while many investors purchase with the intention of refurbishing, monetary hurdles often prevent them from following through.
In a booming market, you might be able to use the equity in your home to fund such a renovation. Equity is the difference between the market value of your property and the amount you still owe on the home. So if your investment property has increased in value since you’ve paid down your loan, you essentially can access this equity to undertake maintenance or renovations on your property.
4. You can also access equity for a deposit on a new investment property
You can use the equity from one investment property to put a deposit down on another investment property, growing your portfolio. Remember though, using the equity in your home requires you to owe more overall on your home loan. If the increase in capital growth on your property through renovations or purchasing another investment property outweighs the amount you owe on your loan, then it might be something to consider.
A better rate, extra features and the ability to access equity for renovations or deposits are just four of the reasons investors typically look to refinance their home loan. Others like to refinance their loans to consolidate debts from renovations, car loans or personal loans, or even gain tax benefits by investing in more property.
Regardless of your reason, every smart investor looking to build up a sustainable and profitable portfolio should assess their investments and mortgage on an annual basis. Of course, switching home loans is no easy feat – there are often break fees or specific terms when changing. It is best to speak with your financial adviser, mortgage broker or property investment specialist who can offer sound advice on what’s the best move for you.