If you’re a property owner I’m sure you’ve seen the term “refinancing” in relation to your existing loan, but unless you’ve done it before you may have questions:
• What does “refinancing” actually mean?
• Why would you do this?
• How do you do this?
Refinancing is the process of taking out a new mortgage and to replace and pay out an existing mortgage.
There are many reasons that you may want to refinance – but at the core of it the motivation is that you’re looking for a better deal with a cheaper interest rate. What many don’t realise is that some lenders generally offer strong discounts and lower rates for new business, with the shadow effect of this being that existing borrowers pay more as you can see in the below chart.
We would always suggest to someone looking to refinance to try and negotiate with their existing lender (for our clients we do this for them) in order to agree a better rate as refinancing does incur some transactional costs. These costs are usually the outgoing lender discharge fee, govt registration fee and any new lender up front fees; we would usually estimate the cost at around $1,000. The other thing to consider is if you’re locked into a fixed rate there may be break costs and this may mean a refinance is not economical, but we’d recommend you get in contact to discuss the scenario as fixed rates can be more complicated and there may be other options.
There are a raft of other reasons beyond chasing a lower rate which may include:
• Releasing Equity (Cash Out)
• Consolidating Debts
• Extending Interest Only Terms
• Reducing Repayment Size
• Not satisfied with existing Lender’s service
One of my personal favourite strategies that I have used in property investing has been using funds from an equity release to add value to property (I’ve captured below before and after photos of the kitchen in a the past project!). Some lenders will allow you to increase your loan size based on the value of the property and release these funds for (generally non-structural) renovation.
For example, you may have a property that is in tired condition and has not been renovated for 20 years worth $1m with a $500k loan. By increasing that loan size to $600k you can release $100k to spend on cosmetic renovations that when done well, can improve not only the value of the property but rental returns if it is an investment.
The process of refinancing is quite simple and straightforward, the most important consideration is that each lender has a different assessment criteria and credit policy in relation to what is possible with refinancing which a broker can help navigate for you.
If you think you could benefit from refinancing, or have ambition to leverage the equity within your current property don’t hesitate to get in contact to discuss your scenario.
The Kitchen Renovation Example (…. of course this is before!)