Refinancing an Investment Property: Considerations and Benefits
By Luke Kidd
Many property owners who have fixed rate mortgages are about to face higher variable payments as their terms end, and this creates a dilemma for investors: should they refinance now or not? According to data from the Reserve Bank of Australia (RBA), 450,000 mortgages will switch from fixed to variable rates in 2024.(1)
Refinancing an investment property can be a smart financial move, but it's important to carefully consider the benefits and costs involved. In this article, we'll explore the key factors to consider when refinancing an investment property, including equity, market performance, and the costs involved.
Equity
Equity is the difference between the current market value of your property and the outstanding balance on your mortgage. For example, let's say you have an investment property with a current market value of $500,000 and an outstanding mortgage balance of $300,000. In this case, your equity in the property would be $200,000 ($500,000 - $300,000).
If you have built up significant equity in your investment property, refinancing can allow you to access that equity and put it to work for you. For example, you could use the funds to make improvements to the property, invest in other assets, or pay down high-interest debt. Additionally, accessing the equity in your property can provide you with greater financial flexibility and allow you to take advantage of new investment opportunities as they arise.
Market Performance
Another important factor to consider when refinancing an investment property is the current state of the real estate market. In recent months, many capital cities across the country have seen a rise in property prices (2). According to the Australian Bureau of Statistics, borrowing by investors has increased by nearly 20 per cent in the last year (3),
If property values are rising it may be a good time to refinance to take advantage of your additional equity. On the other hand, if property prices are decreasing and you risk falling into negative equity, it may be better to wait until conditions improve. It’s impossible to reliably predict future market movements, but the present worth of your property can matter a lot when you're looking to refinance.
Costs
Refinancing an investment property can involve significant costs, including application fees, appraisal fees, and closing costs. It's important to carefully weigh these costs against the potential benefits of refinancing. In some cases, the costs may outweigh the benefits, making refinancing a less attractive option. However, it's important to remember that refinancing can also provide long-term benefits, such as lower monthly mortgage payments and the ability to access the equity in your property. Be sure to carefully consider all of the costs and benefits before making a decision
In conclusion, refinancing an investment property can be a smart financial move, but it's important to carefully consider the benefits and costs involved. If you're thinking about refinancing, speak with us to learn more about your options and how we can help you make the most of your investment property.
Luke Kidd in an authorised representative of Alliance Wealth Pty Ltd. (AR: 001242685)