There are great deals around the market at the moment for new lending, and in particular, new lending to investors. The only way to fully share in these is to refinance.
Taking a $400,000 mortgage over 30 years, as an example, you have two options.
Negotiate a lower interest rate on a principal and interest loan: if you shop around you can potentially cut 1 per cent off your interest rate, which saves about $300 on your monthly payments or $110,000 over the life of your loan.
Start, or restart, an interest-only loan: while this will cost you more in the long run, in the short term, you’re $400 a month better off, with the added bonus you can free up your cash for other investments and optimise your tax deductions.
Steve Mickenbecker, Canstar finance expert, said the obvious reason for refinancing is to “show me the money”.
When should I refinance my rental property?
The short answer is: start looking now!
“With no mortgage stamp duty, and high early repayment fees now barred, it is a much lower cost to refinance than it has been in the past,” Mr Mickenbecker said. “If refinancing means you are getting a much better deal, the costs are unlikely to stop you.”
The highly competitive lending market also gives you some leverage to negotiate, or even avoid, fees associated with refinancing, such as “break costs”, valuation, documentation and applications costs, and legal fees.
Mr Mickenbecker said it can cost from $0 to $3,300 to refinance your loan, but with the average expense of just $720, it’s a small price to pay for the potential savings.
How to refinance
When refinancing your rental property, you can stick with your current lender, known as “internal refinance”, or find a more competitive offer elsewhere, called “external refinance”.
Internal refinance is the simpler option, as your lender already has all your information and you’ve proven your creditworthiness.
Some lenders, however, won’t offer you the best deal – the same rate they use to attract new business – because they believe you’ll settle for a higher rate to avoid the hassle of moving your loan elsewhere.
The key to refinancing, Mr Mickenbecker said, is doing your research so you can negotiate from a position of power.
“As for all challenges in life, fortune favours the brave and those who go into the fray well prepared. Refinancing can feel like the fray, but it has actually never been easier nor have the rewards ever been greater.”
The first step in refinancing your rental property is working out what you could be paying versus what you are currently paying. Comparison sites such as canstar.com.au are a good place to start.
Mr Mickenbecker advised that if you can save 0.20 per cent to 0.30 per cent, refinancing is worth the effort.
Since it’s easier to refinance with your current lender, be upfront and ask for a better deal.
Arm yourself with the details of specific loans being offered by competitors and be prepared to walk away if your lender doesn’t come to the table. If, however, you are happy with their counter offer, start the paperwork.
If you can’t sway your current lender, start applying elsewhere – either directly with the mortgage supplier or through a broker.
This will require some paperwork – tax returns, pay slips, personal balance sheets – as well as meetings, application forms and potentially a property inspection.
Be aware that brokers are reluctant to put through multiple applications at the same time, so put your foot down or do it yourself. Just remember, a bit of pain now is worth it for the long-term gain.
The lending market is in a high degree of flux right now. What was the best deal three months ago, may not be the best right now.
Keep a close eye on the market and be prepared to change tack if a better deal emerges.
When you have an approval or two, go back to your lender.
“You have demonstrated that you are serious and your lender might now also get serious and offer you a better rate,” Mr Mickenbecker said.
“Whether or not this was your plan at the outset, you may be able to set up some competitive tension and end up auctioning to the best offer. Stick with it, even as it gets uncomfortable.”
At the end of the day, whether you stay with your lender or go to the competition will come down to what you will save – including any costs to refinance – against the effort to move. In either case, you’ve already done the hard work.
All that’s left to do is complete your refinancing paperwork, settle your existing loan and change your repayment direct credits. This is something your lender will help you with.