Refinancing an investment property can help you reduce your mortgage interest rate, access equity or change the way your loan is structured. But before switching, you need to understand the total cost, whether you can qualify for the new loan and how the decision affects your longer-term property plans.
For investors, the calculation goes beyond the advertised interest rate. A lower monthly repayment may come with a longer loan term, while releasing additional equity can increase your mortgage debt and affect your capacity to borrow again. Application costs, fixed-rate break fees and tax treatment also deserve attention.
This guide covers seven things to check before refinancing an Australian investment property, including how much equity you may be able to access and what alternatives are worth comparing if your main goal is to obtain capital.
1. Start with ‘why’ refinance your investment property loan
Whether you should refinance your investment property loan probably boils down to the ‘why’ - what are you solving for? While we don’t provide financial advice, the following is a list of some of the key reasons people consider refinancing - some of which make sense, and some of which don’t make sense, depending on your objectives.
a) Continue investing in property
If you’ve built up a lot of equity in your property, a cash-out refinance could give you extra cash to buy, or put down a deposit on another property. That could mean additional rental income and extra capital growth.
The complexity arises when you need to consider whether refinancing to cash out the money you need for your next deposit aligns with your long term debt and portfolio strategy. For example you’ll need to move onto a loan that is going to charge you a higher interest rate on your entire loan balance, the incremental cost of accessing that money might be much more than you initially realise and limit your ability to continue to borrow and grow your portfolio.
Consider an investor with an existing $500,000 investment mortgage at 6.00% interest who wants to access another $100,000. If their lender increases the entire balance to $600,000 and the rate on the whole amount becomes 6.50%, their annual interest cost would rise from $30,000 to $39,000 under a simplified interest-only calculation. That is an additional $9,000 a year, before fees, tax or any principal repayments.
Of that increase, $6,500 comes from interest on the additional $100,000 at 6.50%, while $2,500 comes from the higher interest rate on the existing $500,000 balance. However, lenders do not always reprice the whole mortgage in this way. A top-up may be provided in a separate loan split or on different terms, so the investor should obtain an actual quote and compare the total cost of the proposed arrangement.
Accessing another $100,000 may also affect how a lender assesses future borrowing, but the impact cannot be expressed as a fixed reduction in borrowing capacity without knowing the investor's full financial position and the lender's criteria.
b) Lowering your overall mortgage cost
The most common reason people refinance is to get a better interest rate and most people do this because they want to ‘save’ money.. While this makes sense at a high level, it’s worth digging deeper into your main objective given a few competing priorities:
- Borrowing capacity vs interest cost: if your main objective is lowering your interest rate, it might mean borrowing less money so that the banks see you as a lower risk borrower and therefore charge you a lower interest rate. You’ll need to weigh up the pros and cons of borrowing more money at a higher interest rate vs. borrowing less money at a lower rate but not being able to access as much finance.
- Lower interest vs. lower cost: while these might sound like one and the same, they are often the complete opposite. For example, an investor who has 20 years remaining on their mortgage might refinance to a lower interest rate but restart the loan over 25 or 30 years. Their monthly repayments could fall, yet the longer period over which they pay interest could increase the total cost. Compare the interest and fees over the same period and check how much debt will remain at the end of that period before deciding whether the new arrangement is genuinely cheaper.
- It is also worth asking whether you need to switch lenders at all. Your existing lender may offer a more competitive rate if you request a review, particularly when you have a sound repayment history and a reasonable loan-to-value ratio.
- Lower repayments versus lower total cost: An interest-only mortgage can reduce your required repayments during the interest-only period because you are not paying down principal. However, the loan balance is not falling during that period, and the later principal-and-interest repayments can be higher. Compare the total interest payable, the remaining loan term and your future cash flow, rather than relying on the initial monthly repayment alone.
- The three other significant considerations are: Lenders having minimum equity requirements, typically at least 20%. If you don't have enough equity, you may need to pay lenders mortgage insurance (LMI) when refinancing. Use an LMI calculator to see how much you might have to pay.
- If you're on a fixed rate, lenders may charge a break cost if you exit the loan before the fixed period ends. If those costs outweigh what you save by switching to a lower rate, you may not get the lower monthly repayments you want. A repayment calculator may be useful here.
- Lenders often have long application processes and complex eligibility criteria. You may need to provide extra documentation and wait a long time before you see your money.
Before refinancing, compare home loans and rates across different lenders to understand your options.
2. How Soon Can You Refinance an Investment Property?
You can generally refinance your investment property as soon as you like. But just because you can, it doesn't mean you should.
What is the process for refinancing an investment property?
Refinancing usually starts with a review of your existing mortgage, the rate and features available elsewhere, and the costs involved in switching. You then apply to your chosen lender, which assesses your income, existing debts, property value and ability to service the proposed loan. If approved, the new lender arranges settlement and discharges the old mortgage.
For property investors, useful documents to prepare include recent mortgage statements, evidence of employment or business income, details of other liabilities, rental income statements and lease information. Your lender or broker may ask for further records based on your circumstances. Before signing, check the approved amount, rate, loan term, offset and redraw features, fees and any conditions attached to releasing additional equity.
Aside from potential costs like LMI and break fees, you should also consider:
- Serviceability: You’re essentially trying to replace your existing loan with a new one. Your new lender will want proof that you have a steady income and a good history of paying on time. They'll also want to know your loan amount is not more than your investment property’s value.
- Changes in circumstances: If your personal or financial situation changes, your refinancing application may be less straightforward. For example, if one spouse takes a career break or if you’re approaching retirement, lenders may question whether you can afford the new loan, as well as your borrowing power.
- Refinancing costs: Some expect to save thousands in loan repayments by refinancing, but the reality there can be costly upfront charges. It’s best to check with your new and existing lender to understand your exact costs.
- Interest rates: Interest rates are typically higher for property investors and there’s no guarantee that you can secure a lower rate. If you want to refinance to a lower rate, it makes sense to calculate how much you’re actually saving compared to your existing deal. You may also lose handy features, like offset accounts, when switching.
- Turnaround time: Refinancing can take several weeks, but there is no universal 1–3-month timeframe. Timing depends on the lender, valuation, application complexity, required documents and settlement process. If you need capital for a particular property purchase or renovation deadline, ask the lender or broker for an indicative timeline before committing.
- Tax implications: If you’re refinancing to draw equity for personal reasons, there may be tax implications (more below).
Timing can be everything. How refinancing impacts your long term debt and portfolio strategy can significantly outweigh the optics of a lower rate if it means you end up paying more interest and can’t continue to grow your portfolio.
3. How Much Equity Do You Need to Refinance an Investment Property?
An 80% loan-to-value ratio (LVR) is commonly used as a reference point because borrowing above it can trigger lenders mortgage insurance (LMI) and different lending conditions. However, an LVR above 80% does not automatically make refinancing impossible. Some lenders may consider higher-LVR applications, subject to their policies, credit assessment and the associated costs.
For example, if an investment property is worth $500,000 and the mortgage balance is $340,000, the current LVR is 68%. Refinancing that existing balance is different from asking to release extra cash. If a lender allowed borrowing up to 80% LVR, the maximum secured amount under that simplified calculation would be $400,000, leaving $60,000 of potential additional borrowing before fees and approval requirements. Actual access still depends on serviceability and the lender's valuation.
That’s no small barrier. If you want to refinance but have less than 20% equity, make sure you’re aware of the LMI costs and that the cost justifies refinancing. If you’re not sure about your equity, use an equity calculator to give you an idea.
If your LVR is high, you could invest in improvements to increase your property’s value. You could also overpay on your repayments. This reduces your debt and the total interest you pay, but some lenders will charge you for overpaying, so make sure you know all the costs before you start.
4. Are Refinancing Costs Tax-Deductible?
As an investor, you can claim some refinancing costs when you submit your tax return (usually between July and October), though there are rules around determining tax deductibility.
What you can claim as a tax deduction
Of the initial refinancing costs, you may be able to deduct some, or all, of your:
- Loan application fee
- Mortgage discharge fee
- Loan exit fee
- Valuation Costs
- Title search fee
- Mortgage broker fees
- LMI
- Loan registration costs
- Break costs (not applicable to variable rate loans)
When do you claim tax deductions for the costs of refinancing?
Refinancing costs are generally considered to be borrowing expenses, i.e. the cost of obtaining, financing, or discharging a loan to purchase your investment property. The property must be for producing income, not for you to live in.
If the borrowing expenses you are claiming are under $100 in total, you can claim them in the same financial year you incurred them. Otherwise, you could claim them as a tax deduction spread equally over a five-year period or the loan term (whichever is shorter).
If the mortgage is repaid in full within that period, you may be able to claim the remaining tax deductions in the same year. Generally, expenses related to the discharge of a mortgage can be claimed in the year they were incurred.
What you can’t claim as a tax deduction
Obviously, not everything is tax deductible, for example:
- When refinancing to buy an investment property, stamp duty isn’t tax-deductible as it is considered a ‘capital expense’, or expenses you incur when buying or selling an investment property.
- You can’t claim associated costs if you’re refinancing your home loan, as you’re not using the home you live in to produce an income.
- If you refinance and the proceeds from the refinance are used for personal reasons like a family vacation, the interest on the money you used for personal purposes isn’t tax deductible.
- If you split the loan for personal and investment purposes, you can only deduct the interest on the portion that you invested.
It’s a good idea to keep records of your rental income and expenses to make tax returns easier, particularly if you have a negative gearing strategy.
Finally, remember that depreciation, administration, and maintenance could all be deductible too. The ATO provides comprehensive rules on what is and isn’t deductible, but consult with a professional to determine which costs you can claim.
5. Tax Implications When Refinancing an Investment Property
Refinancing an investment property affects your tax return, but it varies depending on your circumstances. Here are some common refinancing scenarios and what you need to know.
Draw equity for your investment property
If you refinance an investment property loan and release equity to spend on your investment property (e.g. for renovations), the interest on the loan may be tax-deductible. For example, if you accrue $4,000 in interest from your $40,000 loan in one year, you could claim the $4,000.
If you take out a home equity loan to buy an investment property, the interest may still be tax-deductible because the funds are related to real estate that generates rental income. But you can’t claim interest on any portion of the loan associated with the property where you’re living.
Draw equity for personal use
If you refinance and release equity for personal use (for example, buying or renovating the home you live in), those funds are classed as for a private purpose. This means you typically can’t claim interest on that portion of the loan as a tax deduction.
For example, if you spent $25,000 on an investment and $25,000 on a new car from a $50,000 cash-out refinance, you may be able to claim half the interest as tax deductible, but not all of it.
Refinance without drawing equity
If you refinance an investment property without taking out any cash (for example, to get a lower interest rate), the tax implications are generally the same as when you first took out the original investment loan. Provided the loan is used for the rental property, the interest on the new mortgage may be tax-deductible.
For instance, say your outstanding balance on your rental property is $100,000 and you were paying $9,000 per year in interest. If you switch to a lower interest rate, with the same-sized mortgage, that reduces the interest to around $7,500, so you have $7,500 of tax-deductible expenses.
Convert rental property to non-rental property
If you refinance and stop renting your property out so that it can be your home or holiday home, the interest on the new loan may not be tax-deductible. That’s because you’re now using it for personal reasons.
For example, Haashym has a property by the coast that he’s been renting out but which he now wants to use for vacations with his family. He was previously claiming $15,000 per year in interest as a tax-deductible expense, but he stops now that he’s not renting it out.
Convert non-rental property to rental property
On the flip side, if you refinance and start using your home as a rental property, the interest on the new loan may be tax-deductible. So, if Haashym has had enough of beach vacations and decides to switch back to renting the property out, he can start claiming the interest again,
It’s always best to keep clear records and consult with a tax professional for specific advice on the implications for your personal situation, helping you make informed decisions about refinancing.
6. Credit Score Requirements for Refinancing Rental Properties
A decent credit score goes a long way in helping you refinance. But for property investors, navigating Australian credit score requirements can be tricky.
For starters, the credit assessment system varies depending on the lender and lenders don’t usually publicise their criteria. That means qualifying with one lender doesn’t necessarily mean you’d qualify with others, so there’s no magic number that guarantees approval. To make matters more complicated, Australia has three major credit reporting bodies — Equifax, Illion, and Experian — all of which use different methods and benchmarking systems.
Broadly, more established lenders require a higher credit score for refinance applications while smaller lenders are often less strict. In fact, some small lenders may not even consider your credit score, instead focusing on other factors.
Submitting multiple formal credit applications in a short period can create several credit enquiries and may affect how lenders assess your application. Before applying, ask a mortgage broker about each lender's criteria and whether an initial eligibility discussion can help narrow your options. Checking your own credit report does not harm your credit score, and lenders consider more than the score alone when deciding whether to approve a refinance.
Another common pitfall is not improving your score. If you pay your bills on time, monitor your credit reports for errors, and pay off high-interest debts like credit cards and short-term loans, you can get your score up and improve your chances of getting finance.
7. Is It Worth Refinancing Your Investment Property?
Don’t assume that refinancing is the only option, especially if your objective is to release equity for renovations or new properties. As we explain elsewhere in more detail, refinancing isn’t always the best option. Refinancing your long-term debt to solve a short or medium term need might not be the best solution.
To decide if a cash-out refinance is right for you, ask yourself:
- What’s the real cost of interest in dollar terms over the life of my loan?
- How will this impact my overall purchasing power and ability to meet my long-term property goals?
- How will this impact my tax?
- How will this impact my cashflow?
- How long will this take and what is the opportunity cost involved in locking this in now?
If, based on this framework, you decide that cash-out refinancing doesn’t make sense, you might consider Futurerent as an alternative.
What are the alternatives to refinancing an investment property?
Before replacing your mortgage, consider whether you can achieve the same outcome with a smaller change. If you are refinancing mainly to reduce interest costs, ask your current lender to review the rate. If you need additional money, check whether an existing redraw facility or a mortgage top-up would suit the amount required. A top-up usually increases the balance of your current mortgage without necessarily changing its term, subject to the lender's approval and conditions.
Another option for eligible rental-property owners is accessing a portion of future rental income upfront through Futurerent. The funding structure and ongoing cash-flow impact are different from additional mortgage borrowing, so compare the total dollar cost and the amount of rent you will continue receiving. NAB's home loan top-up guide provides a useful explanation of the difference between topping up and refinancing.
Benefits of Using Futurerent Instead of Refinancing
Futurerent allows eligible Australian property investors to cash out up to $100,000 per investment property, or up to $500,000 across a portfolio, without refinancing or changing their existing mortgage. The advance is provided through an agreement involving a fixed portion of future rental income. Your property manager continues collecting rent from the tenant and distributes the agreed portion to Futurerent, with the remaining rent paid to you.
Approval is property-based, and eligible applicants can receive funds in as little as two business days, subject to completion of the required steps. Applying uses a consented soft credit check that does not affect your credit score. There is an upfront setup cost and a fixed funding cost, so investors should compare the full cost and the effect on monthly rental cash flow before proceeding. Future mortgage lenders may also consider the rental income allocated to Futurerent when assessing borrowing capacity. For more detail, read our guide to rental income advances for property investors.
Real-Life Example
Here’s an example. David wanted to refinance his $800,000 investment property to release $75,000 for a second purchase. Instead of paying break costs and LMI, he used Futurerent to access $75,000 of rental income without altering his loan. The results:
- David got his money in two business days, meaning he could crack on with his second purchase.
- His credit score stayed at the high level he’d worked hard to achieve.
- He didn’t have to refinance his loan or change his long term debt strategy.
Refinancing an investment property loan is a complex and potentially long process. There are a lot of steps to understand if you can or should refinance, and depending on your objectives you might go about it in completely different ways.
But whether you’re looking to reduce your monthly outgoings or invest in your portfolio, the hoops you have to jump through and the paperwork stay the same. If you go ahead, it’s vital that you’re aware of the pitfalls laid out in this guide, both in the application and when it comes to costs and taxes.
How Does Futurerent Impact Tax?
Futurerent has obtained a product ruling from the Australian Tax Office (ATO) to make things easy come tax time. At the end of each financial year, Futurerent will provide a statement showing the rent collected by Futurerent and your indicative accrued rent (see paragraphs 15(b) and 15(c) of the product ruling).
The statement is intended to assist you in filling out your tax return and does not constitute tax advice. Futurerent does not provide taxation advice. You should review the product ruling for more information and seek your own tax advice on the application of the product ruling to your own specific circumstances. If tax laws change or if the Commissioner of Taxation withdraws the product ruling, it may result in different tax outcomes than those described in the product ruling. You can get a copy of the product ruling here, or contact us at [email protected] for a copy of the product ruling (free of charge).
Please note that the product ruling from the Australian Tax Office:
- is only a ruling on the application of taxation law
- is only binding on the ATO if the Scheme is implemented in the specific manner outlined in the product ruling.
- The Commissioner of Taxation (Commissioner) does not sanction, endorse or guarantee this product. Further, the Commissioner gives no assurance that the product is commercially viable, that charges are reasonable, appropriate or represent industry norms, or that projected returns will be achieved or are reasonably based.
- Potential participants must form their own view about the commercial and financial viability of the product. The Commissioner recommends you consult an independent financial (or other) adviser for such information.
While everyone’s individual circumstances are different and we cannot give tax advice, a general example of an investor who gets $30K upfront from Futurerent is laid out in the table below. The investor gets the $30k upfront but is taxed progressively over time and only taxed on the rental income they are receiving net of rent that is going to Futurerent i.e. $27,660 of income each year instead of $30,000.
In this example, the investor receives $30,000 upfront while continuing to receive a portion of their rental income over the following three years. The arrangement results in $7,020 of funding costs before any separate setup fee.
For eligible arrangements covered by ATO Product Ruling PR 2023/5, the upfront rental prepayment is recognised progressively as assessable income under the conditions of the ruling, alongside the additional rental income received. This example illustrates how the timing of income recognition can differ from when the cash is received.
The actual tax implications depend on the agreement, applicable tax rules and the investor's circumstances. Futurerent provides annual statements to assist customers and their accountants with their tax reporting. Investors should seek independent tax advice to understand how their agreement is treated.
Want a simpler way to unlock equity from your rental property? Find out how Futurerent can help you fund your next move without refinancing.
FAQs
Can I refinance my investment property with less than 20% equity?
Potentially, yes. Some lenders may accept applications above 80% LVR, although they can require lenders mortgage insurance and apply different conditions. Approval also depends on income, debts, credit assessment and the property's valuation.
How long does it take to refinance an investment property?
Timing depends on the lender, the complexity of the application, the valuation and settlement requirements. Some refinances complete in a few weeks, while others take longer. Ask for an indicative timeframe, especially if you need funds for a particular deadline.
Are investment property refinancing costs tax-deductible?
Some costs and interest expenses may be deductible where the borrowing is used for income-producing purposes. Borrowing expenses and ongoing interest can have different deduction rules, and mixed private and investment uses may require apportionment. Ask your accountant to assess the proposed refinance.
Can I top up my mortgage without refinancing?
Some lenders allow existing customers to increase their loan balance through a mortgage top-up, subject to approval. A top-up is different from replacing the mortgage with a new loan, and it may retain the existing loan term. Compare the interest, fees and repayment impact.
What are the alternatives to refinancing for property investors?
Depending on your circumstances, alternatives may include negotiating a better interest rate with your existing bank, accessing redraw or savings, applying for a mortgage top-up, or considering a rental income advance. Futurerent allows eligible investors to access capital without refinancing, with a fixed portion of rent allocated through the agreement. Compare the total costs and cash-flow effects before choosing an option.
