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Many Australians 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.
Learn more about investing in property
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.
Take a look at this example:
Brad owns a home worth $500,000 and owes $200,000 left on it. This means he has $300,000 in equity and a Loan to Value Ratio (LVR) of 40%. After doing some research and speaking with his mortgage broker, Brad decides to buy an investment property. He refinances his existing mortgage with a new lender to get access the $200,000 of equity, which brings his LVR up to 80%.
Brad could've refinanced up to as much as a 90% LVR, giving him more to invest, but he decides not to as this would mean he'd have to pay a lender's mortgage insurance (LMI) premium.
With his $200,000, Brad buys an investment property and uses a combination of rental income and his salary to gradually pay it off.
If Brad built up more equity in both his home and investment property, you can see how Brad could carry this out again to purchase another investment 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:
The risks associated with buying a property and the fact that your home is being used to fund it mean you should get professional advice and do your own research.
Decide the type of property you'd like to invest in- residential or commercial, apartment or house- as well as the areas you'd like to buy in.
Access suburb reports from sources such as RP Data and speak to as many professionals as you can to ensure that refinancing to invest in property is a sound financial strategy for you.
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I was wondering if you can transfer your equity from an investment property to your place of residence. E.g. I have a home valued at $265,000 and owe $130,000 then i have an investment rental property valued at $250,000 and a loan of $160,000
can i refinance the rental so that i owe $200,000 and put the $40,000 onto my home loan so i only owe $90,000 on my house maximising the tax deductibility of my rental whilst minimising my current house loan?
Hi Tyronne,
Thanks for your question.
Accessing your equity to put the funds into your main residence is definitely possible. If you find that none of these loans are suitable for your situation, there is always the option of speaking to a home loan broker. A broker can help you understand your financial position and they can leverage their panel of networks to find a lender that is more inclined to review your application.
Regarding tax-deductibility, you will need to confirm this aspect with your trusted accountant.
Cheers,
Shirley