Switch your investment home loan and get a better rate
30th July 2020 - Freya Cormack
When you secure a lower interest rate by switching investment home loans, you could make big savings. In addition to this, you might also find a home loan that is better suited to your changing needs and evolving lifestyle.
Keep reading to learn more about switching investment loans to get a better interest rate.
When should you refinance your investment home loan?
When you switch to a new home loan, the process is called refinancing. While refinancing can seem intimidating, it isn’t something to be worried about. It’s actually a smart idea to look into refinancing every couple of years. With interest rates currently at a historic low, now might be the time to do it.
The main thing to consider is whether your current home loan is still competitive and suitable to your life now. Home loans are typically long term, so it’s likely that the mortgage your bank gave you 5 years ago is no longer the best option for you.
Can I ask my bank for a better interest rate?
Yes! Asking your bank for a better interest rate is one of the first moves you should make when looking into refinancing. By doing this, you might be able to get a lower rate without enduring the full refinancing process. Start by researching what investment loan rates your lender is now offering to new customers.
Be careful to look at investor rates, as opposed to owner occupier interest rates. When you buy a home to live in (i.e. owner occupied), you will usually have access to lower interest rates than property investors do.
If the interest rates being offered to new investors are lower than your current rate, call up your bank and start negotiating. Alternatively, a mortgage broker will be happy to negotiate on your behalf.
The benefit to remaining with your existing lender is that you are familiar with how they operate and refinancing with them might be a simpler process. Consider whether you are happy with the services your lender offers.
If you aren’t pleased with the way your lender operates and communicates, you can check out other banks. A lower interest rate shouldn’t be your sole focus when refinancing. Make sure you are happy with the bank and the overall mortgage product.
How much equity do I need to refinance my investment home loan?
A decent portion of equity can give investors a lot more bargaining power in the refinancing process. For anyone refinancing their home loan, having at least 20% equity is ideal. Your equity tells your bank how much of your property you own outright. However, it’s not just about how much of your loan you’ve repaid — it’s calculated by working out the difference between your property’s value and loan balance.
Property values aren’t fixed and it’s likely that yours has changed over time. So, banks will appraise your property and look at its current value, rather than its value at the time of purchasing. A property’s value can be influenced (positively or negatively) by the following factors:
- Renovations, updates and extensions
- High growth areas
- Local infrastructure and developments
- Proximity to good schools
- The economy
- Gentrification and changing neighbourhood dynamics
While your home equity will have to be formally calculated if you refinance, you can try out online calculators. Banks often offer property valuations for free when you refinance, but you may be able to use an independent valuer.
Note: if your equity is below 20%, you may be subject to Lenders Mortgage Insurance (LMI) fees.
Check your finances
Having a good financial standing will present you with more options when refinancing or seeking out a lower interest rate. Your bank will assess your income, credit rating and spending habits, in addition to your equity.
As an investor, your rental income will be examined too. For many investors, their rental income covers their loan repayments and property-related expenses. This is something banks view favourably. Investors who are in an all-around comfortable financial situation will be deemed as lower risk and more eligible for lower interest rates.
Take the time to analyse your financial situation before you switch investment home loans. In the months leading up to refinancing, be careful to make on-time repayments on your mortgage and any other loans. Don’t forget to watch your spending patterns and focus on saving.
Switching from an interest only investment home loan
Interest only mortgages are frequently used strategically by property investors. If structured correctly, investors could maximise their tax deductions and make a big profit by selling the property quickly when home value increases.
However, interest only home loans are risky. For this reason they’re typically charged higher interest rates. Investors who don’t sell their property before the end of the interest only period will encounter large repayment increases to account for the principal (loan amount) in addition to the interest.
Plan ahead, and make sure you’re ready for increased repayments. It’s smart to switch to a P&I home loan early, as you’ll end up paying less in interest over the course of your loan. Plus, you’ll get to benefit from lower interest rates.
If you’re considering applying for an interest only home loan, speak with a financial professional to discuss whether this is the right move for you.
Improving your mortgage with loan features
Utilising loan features is a great way to enhance your mortgage repayment experience. When you next refinance, consider adding on an offset account or redraw facility to minimise the interest you’ll have to pay. An offset account works as a savings account linked to your home loan. The funds in this account can be accessed anytime and they offset how much interest you pay.
For example, if you have $30,000 in your offset account attached to your $200,000 loan balance, you’ll only pay interest on $170,000. This can potentially help you save thousands in interest. A redraw facility operates similarly, except the funds in this account come from extra repayments you make.
There are usually some costs associated with loan features but the benefits might outweigh these fees.
How much will refinancing cost you?
For most investors, their primary concern is to save money when refinancing. Always make sure you understand all the costs associated with the process and that refinancing is financially worthwhile.
If your investment home loan is on a fixed interest rate, you’ll have to pay break fees when refinancing before your fixed period ends. Break costs vary, so it’s best to speak to your bank directly to understand how much you’ll have to pay. Fixed periods are typically between 1 to 5 years, so sometimes it will make more sense to wait to switch loans.
Other costs you might need to pay include:
- Exit fees
- Property valuation
- Mortgage transfer and registration fees
- Loan maintenance fees (monthly or annual)
- Application fees
- Fees for home loan features
You likely won’t pay all of these fees. If fee-saving is a priority for you, speak to a mortgage broker who can advise you on low-fee banks.
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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
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*WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rates are based on a loan amount of $150,000 over a loan term of 25 years. Fees and charges apply. All applications are subject to assessment and lender approval. Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
^The estimated average future interest savings is calculated as at 15 April 2020 based on Lendi assisting customers into new loans with an average interest rate reduction of 0.89% for the 11 months prior, and assuming a median loan term of 26 years on both the old and new loan and all monthly principal and interest repayments will be made on time. Any future savings figures are estimated averages only, and do not take into account any product features or fees (including refinancing or break costs). Your savings will be different.