Can I refinance my investment property?

As a property investor, you might be wondering whether or not you can refinance your investment loan. The answer - yes, absolutely! And while refinancing an investment loan can offer the same great benefits as refinancing your live-in mortgage, there are a few key differences that are worth knowing when it comes to refinancing your investment property.

Investment property loans

Owning an investment property can be a great way to grow your wealth, whether through rental yield or capital gains. But with greater reward often comes increased risk. Many banks and lenders tend to view investment loans as higher risk compared to mortgages for live-in properties. With this in mind, the lending criteria for investment loans are often much stricter and interest rates can be higher to account for the increased risk.

With growing wealth playing a key role in the property investment strategy, it’s important to find an investment loan that aligns with your financial goals. Refinancing your investment loan can help you get the most out of your investment. From saving money on a better interest rate to taking advantage of potential tax benefits, there are plenty of reasons to consider refinancing your investment property. But before you switch up your investment loan, it’s important to do your research and understand the key factors of refinancing an investment loan.

Factors to consider before refinancing your investment property

Because investment loans work a little differently compared to regular live-in home loans, there are slightly different factors worth considering before you get the ball rolling on refinancing. 

Understand your equity position

Before refinancing your investment property, it’s worth checking your current equity position in the property. Take a look at your LVR, which is the proportion of money you’ve borrowed compared to the value of the property. The lower the LVR, the more equity you have in the property. 

Equity is the amount of the property that you own outright.  It is calculated by subtracting the amount owed on a home loan from the property's current value. For example, if your property is worth $500,000 and you have a home loan with an outstanding balance of $400,000, you would have $100,000 of equity in the property. Home loan equity can be important for borrowers in Australia as it can impact their borrowing power and their ability to access additional funds for purchases such as an investment property. Lenders may view borrowers with a high level of equity in their property as less risky, meaning they may be able to borrow more money or secure a better interest rate.

Once you’ve built up some equity in your property, it can be accessed from redrawing additional repayments or by applying for a home loan top up, which allows you to borrow additional funds against the increased value of your house without having to take out a new loan.

While each lender has their own lending criteria when it comes to refinancing investment properties, some lenders might not even consider your application if your LVR is above 80%. Other lenders might charge your lenders mortgage insurance (LMI) to offset the risk of your loan. The amount of equity in your investment property can also affect your ability to access competitive interest rates and loan terms. With this in mind, it’s worth understanding your equity position or LVR before submitting any applications.

Tax implications for investment properties

Regardless of whether your investment property is positively or negatively geared, you can still claim a number of tax deductions that can be used to offset your taxable income. When it comes to refinancing your investment loan, you might be able to claim:

• The loan application fee
• Lenders mortgage insurance (LMI)
• Title search fees
• Loan registration costs
• Discharge and exit fees

These types of costs are known as borrowing expenses. When it comes to tax law and requirements, it often helps to bring in a professional, like a tax accountant or financial, to help you navigate the world of investment property tax implications.  

The role of capital gains tax

While you might not be planning on selling your investment property any time soon, it can be well worth keeping tabs on any capital expenses that you might have to stump up for during the refinancing process. 

When it does come time to sell an investment property, you could be subject to Capital Gains Tax (CGT) depending on whether your investment makes a profit (capital gain) or loss (capital loss). Put simply, CGT is calculated based on the difference between the sale price of your investment property and the property’s cost base. Some refinancing costs aren’t deductible, but they can be added to your investment’s cost base when you sell. Known as capital costs, they usually include expenses like:

• Stamp duty
• Legal expenses or conveyancing fees
• Inspections
• Property valuation fees

By adding these types of expenses to the capital base of your investment, you can reduce the capital gain on your property, and in turn, the amount of CGT you’d be up for. With that said, you’ll need to provide proof of these expenses, so make sure you hang onto all your invoices and receipts. It’s also well worth consulting with a tax accountant to help you wrap your head around your tax obligations when refinancing or selling an investment property.

While refinancing your investment property can unlock a range of great benefits, it’s important to understand the ins and outs of the refinance process before you get stuck into it. There are a few different requirements when it comes to refinancing an investment property, so if you need to, chat with a mortgage broker or tax accountant to help you understand how it works.

At Unloan, we don’t just offer competitive interest rates for live-in home loans, but we also offer them for investment loans. See how much you can save when you refinance your investment loan with Unloan by using our online savings calculator. Learn more about our investment home loans today.

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This article does not have regard for the financial situation or needs of any reader and must not be relied upon as financial product advice. As this information has been prepared without considering your objectives, financial situation, or needs, you should, before acting on this, consider the appropriateness to your circumstances.