Refinance Your Home Loan To Buy An Investment Property
Refinancing your home can help you begin an investment journey
Many investors refinance in order to purchase an investment property to benefit from rental return and potential capital gain which can help borrowers repay their mortgage or use money to invest further.
While buying a property investment may be a good strategy, coming up with the funds for a deposit and associated holding costs can be difficult particularly if you already have a mortgage that you're paying off.
Refinancing is one way to help buy an investment property. It simply involves you refinancing your existing home loan and getting access to your equity to use as a deposit to purchase another property and diversify your portfolio.
The risks of refinancing to invest in a property
Refinancing to borrow more and invest in an investment property can be a useful strategy for some borrowers, but make sure you evaluate the risks, such as:
- Depreciation. If the property falls in value, it may be difficult to build up further equity and you may be in a worse financial position. To minimise the risk of your property depreciating in value, make sure you carefully research the property market to buy in a location that is likely to provide capital gain over time.
- Market risk. If there is limited price growth in the area or there is not enough demand for property, then you may not receive a substantial rental income to cover your repayments. This is why it is essential that you conduct thorough research to ensure that there will be enough demand for your property type. Do your own research to see what planned infrastructure developments are coming up and consider factors such as public amenities and days on market (DOM) to determine whether people are renting in the area.
- Difficult tenants. As an investor, you run the risk of having difficult tenants who may refuse to pay rent, or who may vacate the property without giving you sufficient notice. As a result, you may face untenanted periods where you need to use your savings to cover the repayments until you can find a new tenant. You can lessen this risk by using a lettings agency to help you attract high-quality tenants.
- Refinancing cost. Switching lenders and refinancing your mortgage can be an expensive process which is why you need to estimate the total refinancing costs involved. Sit down with an accountant and a mortgage broker to carefully consider the costs that you'll incur from exiting your current loan as well as the costs of setting up a new home loan (e.g. application or establishment fees).