Refinancing your home loan to buy an investment property

Refinancing your home loan to buy an investment property

If you have been paying down your mortgage consistently while living in your property, you may be considering using your available equity to secure an investment property. While this strategy comes with its risks, there is also great reward to be had in a successful investment.

Of course, there is no point in diving into an investment which you can’t afford that may leave you in over your head. There has to be a balance between the risk you take on and the potential upsides. Reducing your outgoing expenses, so that you free up more income, can be one strategy to reduce the risk of taking on more debt. One way of doing this could be to refinance your existing home loan to a lower interest rate to use the monthly savings to put towards paying off your investment property.

Before you get to this point, however, taking the time to ask yourself some tough questions and get all the right information is the best place to start.

Can you afford it?

The first question to ask yourself should be if you can afford to take on more debt and how it will affect your life if you do. Take the time to work out the answer to this question carefully, as taking on debt that you can’t comfortably afford will have serious implications for your financial situation.

First, look at the amount of useable equity you have in your current property and see if this will be able to serve as a deposit for the investment. You should ideally have 20 per cent of the investment property’s value as a deposit. This size deposit means that you will avoid lender’s mortgage insurance and reduce the bank’s concerns about the potential risk of taking on more debt.

What is useable equity?

Useable equity is around 80 per cent of the value of your property minus any debt still owing. Lender’s won’t usually allow you to borrow the full value of the property in case market prices drop and your loan ends up bigger than the value of the house.

How to calculate:

If your property value is = $880,000

And your current outstanding debt is = $300,000

$880,000 x 0.8 = $704,000

$704,000 – $300,000 = $404,000

Useable equity = $404,000

 

Equity isn’t everything, however, as you will also need to have sufficient income to service both home loans. This means that your income will need to be able to pay both loans and still meet your everyday living expenses which the bank will closely examine. Keep in mind that if you have other credit in the form of personal loans, car loans and credit cards, this will reduce your borrowing capacity. This is why it may be a good idea to refinance your existing owner-occupier loan to a lower rate to free up some extra cash to add to your useable income.

If you are still in the early stages of determining whether you can afford an investment property, then you should use a mortgage calculator to estimate what your monthly repayments would be. Once you have an estimate of how much you will need to borrow, and at what interest rate, you can mock up what your monthly repayment schedule will look like and see how that would fit into your current budget.

After you use the calculator to determine how the repayments will fit into your budget, you need to also factor in an emergency savings buffer. This should be the deciding factor in whether you can afford an investment property. If you won’t have spare cash to put aside for an emergency, such as unplanned time off work, then the potential consequences if you lose your income for a period of time can become catastrophic; from losing your investment property to losing the roof over your head. You should be able to put aside enough cash to cover repayments on your owner-occupier loan and investor loan for at least three months to guard against a situation such as this.

EXAMPLE – Yusuf looks to invest

Yusuf and his wife Semira have been paying off the house they live in for ten years and have built up enough useable equity to make up a 20 per cent deposit on an apartment for an investment property. The apartment is close by and could potentially also be used by the couple’s children in the future or their parents as they get older. In the meantime, the apartment has two bedrooms, a car spot, is close to shops and has a train station nearby.

Yusuf believes they will have no trouble renting it out to help with the monthly repayments. Yusuf heads online to use a mortgage calculator to see how much his home loan repayments will cost each month if he refinances to a larger loan. Yusuf sees that even though the monthly repayment size will increase significantly by refinancing to a larger loan size, the couple’s combined income and the potential rental income could still cover the payments with enough money to spare for comfortable everyday living.

With a further $20,000 stashed away in savings, Yusuf judges that he will also be covered for emergency situations in which he cannot make mortgage repayments for a few months. Yusuf believes he may be in a good position to invest, however, he decides to get some professional financial advice before he commits to taking on more debt.

 

What benefits will you get?

Taking on the added debt of an investment property would hardly be worth it without the benefits you expect to gain from the property. It is important to keep in mind that these benefits come from keeping the property long term and the potential increase in property value. The initial years of your investment will most likely see you run your property at a loss. In this situation, you may be able take advantage of negative gearing and claim your losses against your income for tax purposes.

Rental income is another potential benefit of having an investment property and can be crucial to many people’s investment plans. If you are planning on renting out your property, then getting a rental estimate letter from the real estate agent who currently looks after the property will give you an idea of the potential rent you could earn. Making your own assessment or getting a professional opinion as to the desirability of your potential investment property’s location for renters is also advisable. You don’t want to have the hassle of constantly looking for new tenants to fill your property, especially if the rental income is a big part of your loan repayment plan.

What are the risks?

With every investment there comes a level of risk. Your lender will play a big role in assessing the amount of risk you are taking on by borrowing for an investment property and many different factors will be taken into account. Potential risks include property value growth being less than expected over time or defaulting on your loan due to a lack of income.

Defaulting on your loan can be caused by many, often unpredictable, lifestyle factors, including loss of income, or external factors such as reduced rental desirability in the area of your investment. These risks need to be factored in to your decision before you take on more debt. The more back-up plans you can have in place, like an emergency fund, investments in other assets and diverse income streams, the more secure you will be if something does happen to go wrong.

There is also a chance of being rejected on your refinancing application if the bank deems the amount requested to be too high risk. This can damage your credit score which can have long term implications for your borrowing capacity.

Ready to commit

Young couple sitting on the floor and looking at the blueprint of new home.

If you do decide you want to purchase an investment property, you will need look for investment loans that will suit your needs. Having a loan pre-approved before you begin looking for a property will give you the confidence to go in and bid confidently on properties you may be interested in.

Investment property home loans 

At this early stage of your loan search, you have the choice of remaining with your owner-occupier lender for your investment loan as well or shopping around for the lowest rates on the market. If you have a sizeable deposit and a secure income, chances are that multiple lenders will be interested in your business meaning that you can look for competitive interest rates.

Shopping around for a good rate also gives you an opportunity to consider which features you have been using with your current home loan and which features you would like in your investment loan. For example, if your current loan caps the amount of extra repayments you can make per year, then you may wish to find one that will allow you to make unlimited extra contributions. Alternatively, you may wish to find a loan that gives you fee-free access to a redraw facility or offset account.

While you are researching and comparing investment loans you will likely get a good idea of what the mortgage market is currently offering in terms of owner-occupier loans as well. If your current home loan rate does not seem to be competitive then this is a great chance to consider refinancing your existing loan to reduce the size of your monthly repayments and increase your useable income.

Even though refinancing your loan will most likely come with some initial costs, and require your time in the research and application phase, a switch to a low rate lender will generally save you money in the long run.

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Learn more about home loans

What is an investment loan?

An investment loan is a home loan that is taken out to purchase a property purely for investment purposes. This means that the purchaser will not be living in the property but will instead rent it out or simply retain it for purposes of capital growth.

What is a line of credit?

A line of credit, also known as a home equity loan, is a type of mortgage that allows you to borrow money using the equity in your property.

Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.

This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.

What is equity? How can I use equity in my home loan?

Equity refers to the difference between what your property is worth and how much you owe on it. Essentially, it is the amount you have repaid on your home loan to date, although if your property has gone up in value it can sometimes be a lot more.

You can use the equity in your home loan to finance renovations on your existing property or as a deposit on an investment property. It can also be accessed for other investment opportunities or smaller purchases, such as a car or holiday, using a redraw facility.

Once you are over 65 you can even use the equity in your home loan as a source of income by taking out a reverse mortgage. This will let you access the equity in your loan in the form of regular payments which will be paid back to the bank following your death by selling your property. But like all financial products, it’s best to seek professional advice before you sign on the dotted line.

How can I apply for a first home buyers loan with Commonwealth Bank?

Getting a home loan requires planning and research. If you are considering a home loan with the Commonwealth Bank, you can find the information you need in the buying your first home section of the bank’s website.

You can see the steps you should take before applying for the loan and use the calculators to work out how much you can borrow, what your monthly repayments would be and the upfront costs you’d likely pay.

You can also book a time with a Commonwealth first home loan specialist by calling 13 2221.

CommBank publishes a property report that may help you understand the real estate market. The bank has also created a CommBank Property App that you can use to search for property.  The link to download this app is available on the same webpage.

If you are eligible for the First Home Loan Deposit Scheme, CommBank will help you process your application. The scheme helps first home buyers to purchase a home with a low deposit. You can read details about this scheme here and speak with a CommBank home lending specialist to understand your options.

Can I get a NAB home loan on casual employment?

While many lenders consider casual employees as high-risk borrowers because of their fluctuating incomes, there are a few specialist lenders, such as NAB, which may provide home loans to individuals employed on a casual basis. A NAB home loan for casual employment is essentially a low doc home loan specifically designed to help casually employed individuals who may be unable to provide standard financial documents. However, since such loans are deemed high risk compared to regular home loans, you could be charged higher rates and receive lower maximum LVRs (Loan to Value Ratio, which is the loan amount you can borrow against the value of the property).

While applying for a home loan as a casual employee, you will likely be asked to demonstrate that you've been working steadily and might need to provide group certificates for the last two years. It is at the lender’s discretion to pick either of the two group certificates and consider that to be your income. If you’ve not had the same job for several years, providing proof of income could be a bit of a challenge for you. In this scenario, some lenders may rely on your year to date (YTD) income, and instead calculate your yearly income from that.

How long does Bankwest take to approve home loans?

Full approval for a home loan usually involves a property valuation, which, Bankwest suggests, can take “a week or two”. As a result, getting your home loan approved may take longer. However, you may get full approval within this time if you applied for and received conditional approval, sometimes called a pre-approval, from Bankwest before finalising the home you want to buy.  

Another way of speeding up approvals can be by completing, signing, and submitting your home loan application digitally. Essentially, you give the bank or your mortgage broker a copy of your home’s sale contract and then complete the rest of the steps online. Bankwest has claimed this cuts the approval time to less than four days, although this may only happen if your income and credit history can be verified easily, or if your home’s valuation doesn’t take time.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

Does UBank offer home loan pre-approvals?

If you’re applying for a home loan with UBank, you can first get an approval in principle. You’ll need to provide information about your job and earnings, your household expenses, the assets you own and the debts you owe. 

UBank will assign a home loan specialist to discuss these details over a phone call, which can take about 30 minutes. 

The bank will then confirm if you’ve received in-principle approval for your home loan. Depending on how you submit your documents, this could take a few days or a few weeks. If successful, the approval will be valid for 60 days. 

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

What are the NAB term deposit interest rates for businesses?

If you’re looking to lock in a return on your business savings, one option is a business term deposit with NAB. The big four bank provides competitive interest rates while giving you the flexibility to choose the term. NAB offers business term deposit interest rates for investments of between $5,000 to $499,999.

NAB doesn’t charge any monthly account or application fees. The interest is calculated daily and for the 90-day term and six months term, you will get paid when the deposit matures. For the 12 months term, you can either choose to get paid monthly, quarterly, half-yearly or annually. 

If you wish to withdraw your funds before the deposit matures, you need to give NAB 31 days notice. However, they do make exceptions if you’re experiencing hardship and need the funds immediately. Either way, you may have to bear the prepayment cost, which you can learn more about in the Terms and Conditions.

How do I get a Suncorp home loan pre-approval?

Getting home loan pre-approval helps you work out a budget to help you search for a suitable property and make an offer with confidence. Once you put in an application, you should get your pre-approval outcome within two business days. To help get a fast turnaround time of your pre-approval application, ensure all the information and documentation that Suncorp requires. This includes proof of identification, recent payslips, bank account and credit card statements.

You can submit the home loan pre-approval application online. You’ll be asked for information about your income, expenses, assets, and debts. It should take you about 10 minutes to fill out the application, and you can do it free of charge. A Suncorp lending specialist will review your application and contact you within 24 hours or the next working day. Suncorp will not run a credit check until you have heard from this lending specialist.

Once you get Suncorp home loan pre-approval, it’s valid for 90 days. If you don’t find a property you wish to buy in this time you may be able to apply for an extension, speak to your Suncorp lending specialist about this.

Where can I get all the information about an ANZ first home buyer’s loan?

As a first home buyer, you may require help and hand-holding, and as such ANZ has the buying your first home section on its website full of important information. ANZ also has a form in this section you can fill out to get a free consultation from an ANZ First Home Coach and create your own plan for buying your first home. This coach will help you understand where your current income is being spent and plan for your home loan repayments. You’ll get a clear picture of the costs involved in purchasing a property and how to budget or save for these costs. The coach will help you understand different deposit options and manage your accounts to enhance your savings.

There are three types of ANZ first home loans - Standard Variable, Fixed, and Equity Manager. The features, interest rates, and terms for each are different, and you can compare them here.

When they apply for an ANZ home loan, first home buyers can also get guidance on applying for the First Home Owner Grant (FHOG). This is a one-off government grant that may be available to you when you’re buying your first home. The eligibility criteria for FHOG differs between the different states and territories, which is why it’s helpful to have expert advice when applying.

Why should I get an ING home loan pre-approval?

When you apply for an ING home loan pre-approval, you might be required to provide proof of employment and income, savings, as well as details on any on-going debts. The lender could also make a credit enquiry against your name. If you’re pre-approved, you will know how much money ING is willing to lend you. 

Please note, however, that a pre-approval is nothing more than an idea of your ability to borrow funds and is not the final approval. You should receive the home loan approval  only after finalising the property and submitting a formal loan application to the lender, ING. Additionally, a pre-approval does not stay valid indefinitely, since your financial circumstances and the home loan market could change overnight.

 

 

Can I apply for an ANZ non-resident home loan? 

You may be eligible to apply for an ANZ non-resident home loan only if you meet the following two conditions:

  1. You hold a Temporary Skill Shortage (TSS) visa or its predecessor, the Temporary Skilled Work (subclass 457) visa.
  2. Your job is included in the Australian government’s Medium and Long Term Strategic Skills List. 

However, non-resident home loan applications may need Foreign Investment Review Board (FIRB) approval in addition to meeting ANZ’s Mortgage Credit Requirements. Also, they may not be eligible for loans that require paying for Lender’s Mortgage Insurance (LMI). As a result, you may not be able to borrow more than 80 per cent of your home’s value. However, you can apply as a co-borrower with your spouse if they are a citizen of either Australia or New Zealand, or are a permanent resident.