As a property investor looking to expand your portfolio, you probably know that a cash out refinance is one of your options. But what exactly is a cash out refinance? Is it the right financial move for your situation? How long does the process actually take? And what are the tax implications you need to consider?
You're right to be asking these questions. A cash out refinance represents a significant financial decision for property owners that can impact your investment strategy for years to come. When and how you implement a cash out refinance can have important implications for whether you ultimately benefit from this financing option.
Knowing where to start is tricky but, in this guide, we'll walk you through exactly what a cash out refinance is, the pros and cons, and dive into the finer details of tax considerations, timing, and how you can use the funds.
What is a Cash Out Refinance?
A cash out refinance is a specific type of mortgage refinancing option where you replace your existing home loan with a new one for more than the amount you currently owe on the property. The difference between the new loan amount and your current mortgage balance is what you receive in cash, giving you access to the equity you've built up in your property.
Here's how a cash out refinance typically works:
- Property Valuation: First, your lender will conduct a professional valuation to determine your property's current market value.
- Equity Calculation: Your available equity is calculated based on the difference between your property's current value and your existing loan balance.
- New Loan Creation: You'll obtain a new mortgage that pays off your existing loan while providing additional cash based on your available equity.
- Cash Distribution: After settlement, you receive the "cash out" portion as a lump sum that you can use according to your needs.
For example, if your investment property is valued at $800,000 and your current mortgage balance is $500,000, you potentially have $300,000 in equity. With a cash out refinance, you might take out a new loan for $700,000, pay off the $500,000 balance, and receive $200,000 in cash (minus fees and costs).
Common Misconceptions About Cash Out Refinancing
Misconceptions about cash out refinancing:
- It's not a second mortgage - it completely replaces your existing mortgage
- It's not "free money" - you're borrowing against your equity
- It's not the same as a line of credit loan - a line of credit is a separate flexible facility while a cash out refinance gives you a lump sum and replaces your existing mortgage
Be aware that your new loan terms may include different interest rates due to the higher Loan-to-Value Ratio (LVR). You might also have a different repayment period. The options available for structuring the loan will depend on the type of property and how you plan to use it (i.e., whether you plan to live there or rent it out).
Is a Cash Out Refinance a Good Idea?
Many investors wonder if a cash out refinance is a good idea when they're looking to access equity. The suitability of a cash out refinancing deal depends entirely on your individual circumstances, and there are always benefits and risks to consider:
Potential Benefits
- A cash out refinance gives you access to relatively low-interest funds compared to personal loans or credit cards.
- If you have higher-interest debts, a cash out refinance could help you consolidate them into one, lower-interest loan.
- There are potential tax advantages if you're using the loan for investment purposes.
- If you use the money to invest in capital improvements to your property, it may increase in value.
- You may also be able to use the money for major life expenses or additional investment, including new properties.
Potential Drawbacks
- In many cases, a cash out refinance will increase your overall mortgage debt and potentially extend the repayment term.
- Your repayments and your interest rate could be higher, so you pay more overall.
- Too much debt risks overleveraging the property, which could reduce your flexibility for future borrowing.
- There can be extra costs and hidden fees associated with refinancing such as application fees (to cover the lengthy paperwork associated with applying) and valuation fees (to cover the bank's cost to value your property).
- Reduced equity makes you more vulnerable to market downturns, putting you at risk of going into negative equity.
How Long Does a Cash Out Refinance Take?
Understanding how long a cash out refinance takes is crucial for planning your investment strategy. Timelines vary depending on lender and property characteristics, but in most cases, for a cash out refinance in Australia you can expect:
- Initial application and documentation: 1-2 weeks
- Property valuation process: 3-7 days
- Lender assessment and approval: 1-3 weeks
- Formal approval to settlement: 1-2 weeks
- Total process: Generally, 4-6 weeks from application to funding
Different scenarios may affect these timeframes:
- Complex properties (rural, unique, or high-value) may require specialized valuation, adding 1-2 weeks
- Self-employed borrowers might face additional documentation requirements, extending the process by 1-2 weeks
- High LVR loans (above 80%) requiring Lenders Mortgage Insurance can add an additional 1-2 weeks
You might think six weeks is a long time given how quickly the market can move, and you'd be right. And your timeline could be affected by other factors including:
- Your lender's processing times and current workload
- The complexity of the application
- Your property type and location
- How quickly you respond to requests for additional information
- Current market conditions and the overall lending environment
A lot of these factors are out of your control, but the more you consider these elements, the more realistic you can be when assessing whether a cash out refinance is going to achieve your investment goals.
Is a Cash Out Refinance Taxable?
When considering what a cash out refinance means for your tax situation, it's important to understand the key principles. You should always seek professional advice for your specific circumstances when it comes to tax, but in general:
- Is the cash out itself taxable income? No, the funds you receive from a cash out refinance are not considered taxable income.
- Is the interest tax-deductible? This depends on how you use the funds:
- Interest on funds used for investment purposes may be tax-deductible
- Interest on funds used for personal expenses is generally not tax-deductible
- What about Capital Gains Tax? You may need to pay Capital Gains Tax if you sell the property, but the refinance itself doesn't trigger CGT
Remember that if you use the loan for more than one purpose (e.g., partly for an investment property and partly for a new car), you should keep careful records of how much you used for each purpose.
Finally, let's say you use a cash out refinance from the mortgage on your main home, where the interest is not normally deductible, but then use the money for investment purposes. The portion of the interest on that loan used for investment purposes may be deductible, but make sure you keep detailed records to satisfy Australian Taxation Office requirements.
How Much Can I Cash Out Refinance?
When determining how much you can cash out refinance, several factors come into play. How much you can borrow for a cash out refinance in Australia is determined by:
- Your lender's maximum LVR (Loan-to-Value Ratio) policies, typically 80% of the property's market value
- Your property's current value
- Your income and serviceability assessments, which establish whether you can afford the repayments
- Your existing debt obligations and credit history
- The type of property that you're borrowing against and considerations around its location
Different property types have different maximum LVR limits:
- Standard residential investment properties: up to 80% LVR
- Commercial properties: typically 50-70% LVR
- Rural properties: often limited to 50-70% LVR
- High-density apartments: may be restricted to 70-75% LVR
How to Calculate Cash Out Refinance
Understanding how to calculate your potential cash out refinance amount helps set realistic expectations. Your lender will be able to give you a more precise figure based on your individual circumstances, but you can calculate an indicative figure with these five steps:
- Determine your current property value through a formal valuation
- Multiply the value of your property by the maximum allowable LVR (e.g., 80%)
- Subtract your current loan balance and any other secured debts
- Deduct your estimated refinancing costs, including hidden fees
- Take the remaining figure: that's your potential cash out amount
For example, let's say:
- You get your property formally valued at $750,000
- That means your maximum LVR at 80% is $600,000
- Your current mortgage balance is $450,000
- Your estimated refinancing costs are $3,000
That means your potential maximum cash out is:
$600,000 (80% LVR) - $450,000 (Current Balance) - $3,000 (Fees) = $147,000.
In this case, you're left with $147,000 to spend or invest.
Now, let's look at another scenario with a higher-value property, but less equity in the property:
- Property value: $1,000,000
- Maximum LVR (80%): $800,000
- Current mortgage: $700,000
- Refinancing costs: $3,500
In this scenario, your potential maximum cash out is:
$800,000 (80% LVR) - $700,000 (Current Balance) - $3,500 (Fees) = $96,500.
When to Cash Out Refinance
Deciding when to cash out refinance is critical for maximizing benefits. Timing your cash out refinance in the best way depends on several factors.
Firstly, a lower interest rate environment provides potentially better opportunities, so try to time your refinance when rates are low.
It also depends on you, your property, and your goals. If you have personal financial stability and strong serviceability, and if you have significant equity, you're in a strong position. It's also important to remember your long-term plan. You may not want to take out a new, long-term mortgage if you wanted to sell your portfolio and retire next year. Make sure you have a clear purpose in mind with a positive financial impact.
Optimal timing considerations include:
- When interest rates are declining or at historic lows
- After your property has significantly appreciated in value
- When you've built sufficient equity (ideally more than 30%)
- When your credit score is at its strongest
- When you have a specific investment opportunity requiring capital
How Soon Can You Do a Cash Out Refinance?
Understanding how soon you can do a cash out refinance after purchasing or previous refinancing is important for planning. Your lender may have their own restrictions for when you can do a cash out refinance. Some require that you own the property for 6-12 months before they allow a cash out. Others apply similar restrictions if you've recently refinanced.
Likewise, if you've had a negative credit event like a bankruptcy, default, or missed payment, lenders may require a waiting period before they approve. On the other hand, if you've recently renovated, there might be a waiting period (as much as 3-6 months) before they accept a new valuation that accounts for your improvements.
In some cases, if the property has changed hands several times in a short period, or if there is a dispute over the ownership of your property, lenders may want to hold off. The same goes for market conditions: it's not uncommon for lenders to adjust their policies, or suspend certain products, when market conditions are volatile.
Common waiting periods to be aware of:
- New purchase: Most lenders require 6-12 months of ownership
- Previous refinance: Many lenders impose a 6-month waiting period
- After major renovations: 3-6 months for value recognition
- Following credit issues: 1-2 years after bankruptcies or defaults
Can Cash Out Refinance Be Used for Anything?
A common question about cash out refinancing is whether the funds can be used for any purpose. How you use your cash out refinance can be flexible, depending on your lender. We've focused on investment, but some use a cash out refinance to cover personal expenditure like home improvements or medical expenses. Others use it to consolidate credit card or loan debt and secure a lower interest rate.
Some lenders restrict how you can use the money, for example for downpayments on other properties, or outright prohibitions when it comes to things like tax payments or gambling. Others ask you to disclose how you plan to use it before they decide on the interest rate they can offer.
Common uses for cash out refinance funds include:
- Purchasing additional investment properties
- Renovating existing properties to increase rental yield
- Debt consolidation to improve cash flow
- Business investment opportunities
- Education expenses
- Emergency funds or major medical expenses
Practical Considerations for Australian Borrowers
Whenever you think about refinancing, you should consider the impact on your overall financial position. How does it impact your retirement plans? Does it look like there's a property bubble ready to burst? What's going to happen with interest rates? All these factors play into when and how you decide to go ahead, and with which lender. As with any business decision, you should know what your exit strategy is too.
For alternatives to cash out refinancing that may be quicker and simpler, see our guide on 7 things to know before you refinance an investment property loan.
Ultimately, cash out refinancing is an important decision. It's time consuming, there can be hidden costs, and even a low-looking interest rate can prove to be expensive in the long term. The investors who make the most of cash out refinancing will be those with the financial know-how to make the right decisions.
A Smarter Alternative: Accessing Capital Without Refinancing
While cash out refinancing has been a traditional approach for property investors to access equity, it's worth considering alternatives that might better suit your needs and save you money in the long run.
Why Consider Alternatives to Cash Out Refinancing?
As we've explored throughout this guide, cash out refinancing comes with several drawbacks:
- The lengthy application process (4-6 weeks)
- Extensive documentation requirements
- Full serviceability assessments
- Potential for higher interest rates
- Significant fees and charges
- Long-term interest costs that compound over decades
For many property investors, particularly those seeking to access smaller amounts of capital quickly or those with complex income structures, these drawbacks can make refinancing inefficient and unnecessarily expensive.
How Futurerent Offers a Better Solution
Futurerent provides a fundamentally different approach by allowing property investors to access their rental income upfront without refinancing. Here's how it compares:
Cash Out Refinance vs Futurerent
With Futurerent, you can keep your existing mortgage in place and skip the painful refinancing process entirely. You'll avoid a lifetime of additional interest while gaining the capital you need for renovations, deposits on new properties, or other investments.
One key difference is in the assessment process - Futurerent mainly looks at your rental income rather than putting you through a comprehensive financial examination. This means faster approvals and less hassle, especially for investors with complex income structures or those who own properties through companies or trusts.
For smaller capital needs ($20,000-$100,000), the math becomes particularly compelling. When you consider the true cost of refinancing (averaging $2,082 in fees alone) plus decades of compound interest, accessing your rental income upfront through Futurerent can be significantly more cost-effective.
Learn how much rental income you can access with our easy online calculator.
Frequently Asked Questions About Cash Out Refinancing
What is a cash out refinance?
A cash out refinance is a mortgage refinancing option where you replace your existing home loan with a new one for more than you currently owe, allowing you to access the difference in cash. This financial strategy enables property investors to tap into their built-up equity without selling the property. The new loan pays off your original mortgage and provides additional funds based on the equity you've accumulated.
Is a cash out refinance a good idea?
A cash out refinance can be a good idea if you're using the funds for property investments, renovations that increase property value, or debt consolidation at a lower interest rate. However, it may not be ideal if it significantly increases your debt burden, extends your loan term unnecessarily, or if you're using the funds for short-term expenses. The best decision depends on your individual financial situation, investment goals, and the current interest rate environment.
How long does a cash out refinance take?
A cash out refinance typically takes 4-6 weeks from application to funding in Australia. The process includes documentation (1-2 weeks), property valuation (3-7 days), lender assessment (1-3 weeks), and settlement (1-2 weeks). Complex properties, self-employed applicants, or high LVR loans may require additional time. Preparation and prompt responses to lender requests can help streamline the process.
Is a cash out refinance taxable?
No, the cash you receive from a cash out refinance is not considered taxable income in Australia. However, the tax treatment of the interest on your new loan depends on how you use the funds. Interest on money used for investment purposes may be tax-deductible, while interest on funds used for personal expenses generally isn't. Always consult with a tax professional for advice specific to your situation.
How much can I cash out refinance?
The amount you can access through a cash out refinance depends primarily on your property's value, your lender's maximum LVR policy (typically 80%), your current loan balance, and your ability to service the new loan. For example, with a $750,000 property and a current loan of $450,000, at 80% LVR you could potentially access up to $147,000 (minus refinancing fees). Your income, credit history, and property type will also influence the maximum amount available.
When to cash out refinance?
The optimal time to pursue a cash out refinance is when interest rates are low, your property has significantly appreciated in value, you have substantial equity (ideally 30%+), your credit score is strong, and you have a specific investment purpose for the funds. Avoid refinancing if you're planning to sell soon, if property values are declining, or if you don't have a clear plan for using the funds effectively.
How soon can you do a cash out refinance?
Most Australian lenders require you to own the property for at least 6-12 months before allowing a cash out refinance. If you've recently completed a refinance, many lenders impose a 6-month waiting period before you can refinance again. Additional waiting periods may apply after renovations (3-6 months) or following credit issues like defaults or bankruptcies (1-2 years). These timeframes vary by lender and individual circumstances.
Can cash out refinance be used for anything?
While you can technically use cash out refinance funds for almost any purpose, how you use the money affects both interest rates and tax deductibility. Common uses include property investments, renovations, debt consolidation, business investments, and major expenses. Some lenders may restrict certain uses (like gambling or tax payments) or offer different rates depending on your intended purpose. For maximum tax benefits, many property investors use the funds for investment-related purposes.
