How do the banks assess a ‘cash-out’ refinance? While topping up your mortgage sounds simple, you're actually refinancing your current loan with a brand new loan. This means banks need to reassess the risk of your loan from scratch based on your current circumstances and interest rates, generally factoring in a 3% buffer and also in many cases haircutting your income for various contingencies.
This gets complicated because the banks have an idealistic view of the ‘perfect’ borrower, and this is in stark contrast with reality. Your average borrower could be a couple with a baby, a salesperson working on commission or an executive with a bonus, a small business owner, or simply a more mature borrower looking to retire in less than 30 years.
Unfortunately, for the banks, not all income is 'equal’ and their policies struggle to account for many of these circumstances or short-term changes in someone’s situation.
What makes refinancing so painful?
Here are a few examples of some of the hurdles property investors face
- Paperwork supporting your income - be prepared to provide up-to-date documentation supporting your income - think employment details, payslips, tax returns and investment earnings. Changed jobs recently? You might also need a letter from your new employer, or to wait 6 months or until the end of your probationary period in order to qualify for the loan. Be aware that the banks could exclude bonuses or variable income, like commissions or discount investment-related income, including rental income. If you’re self-employed, you’ll probably also need to provide business activity statements and a few years worth of tax returns. And finally, for those aged over 50, be prepared to provide superannuation statements and a written exit strategy.
- Bank statements - depending on the lender, you’ll probably also need to be prepared to share bank statements for the past 3-6 months substantiating your income and living expenses - the bank will want to evaluate your financial habits and look for consistent income and responsible spending patterns. This gets particularly problematic when looking at one off expenses and considering the bank isn’t just assessing your ability to meet your payments now - the bank will be assessing whether you can afford to make principal and interest payments at a 3% buffer to the prevailing rate, which at the moment means an ‘assessment rate’ of circa 9% p.a.
- Details of all your assets and liabilities - valuation reports, loan statements, and details, everything will need to be revisited. Depending on where the valuation comes in, this might work for you or against you, but it will need to be assessed by someone and this might cost you… which brings us to fees!
- Fees - if you’ve fixed your loan it might be a non-starter if it means breaking your fixed rate, but let’s assume that’s not applicable, you’re probably still looking thousands of dollars in miscellaneous expenses before factoring in your time or your accountant if you need one, here’s a checklist of a few of the hidden costs
- Application fee: $200 - $1,000
- Valuation fee: $300 - $500
- Discharge fee: $150 - $400
- Establishment fee: $300 - $600
- Lenders mortgage insurance: may apply if the loan to value ratio is above 80% and depends on how much equity you have in the property
- Break fees: may apply if you have a fixed-rate loan
What’s the real cost of a cash-out refinance?
Let’s assume you’re prepared to jump all of the hurdles, it’s worth considering the real cost of a higher interest rate if the bank requires it to compensate for the bank’s perceived level of 'risk'.
Imagine you borrow $100,000 on top of an existing $700,000 loan against a $1m property and your interest rate goes from 5.5% to 6.5% - sounds like only 1% right? Let’s zoom in on the real cost of refinancing.
Let’s run the numbers
At Futurerent, our mission is simplifying access to finance for property investors who want to fund their big dreams.
If you represent a higher risk, banks will likely lift your interest rate by 1-5% more than the standard.
What does this mean in dollar terms?
Let’s say your existing rate is 5.5% and you apply to top up your home loan by $100,000 from $700,000 to $800,000. Your bank approves but assesses you as a ‘risky’ borrower, lifting your interest rate to 6.5%.
Over the life of your loan, you would pay:
- at 5.5%, $730,828 in interest
- at 6.5%, $892,811 in interest
So, the extra $100,000 you’ve taken out which has resulted in your rate increasing by 1% p.a. ends up costing an extra $161,983 in interest over a 30-year term. And that’s before we account for extra charges and mandatory LMI payments.
While both options are quite different, using Futurerent to simply bring forward $100,000 of rental income would cost you $23,400 in rental income as a fixed cost plus setup costs of up to $9,295 depending on whether your property manager works with Futurerent. This cost is fixed based on an expected term of 3 years, however, if your property is vacant or your tenant falls into arrears it will take longer for Futurerent to receive the fixed cost at no extra charge to you. Futurerent is taking some risk on how long it takes to receive a fixed amount of rental income.
Imagine a property investor who needs to spend $30k in repairs and maintenance to get the tenant and the rental income they need. They decide to refinance to raise the $30,000 taking months while the property sits empty.
Then, they pay a high interest rate over a long period all to solve a short-term problem. That’s lost rental income, plus extra borrowing costs.
With Futurerent, in contrast, everything is finalised in days. The repairs move ahead, the property gets re-tenanted, and rent gets paid.
So what about tax?
In this example, a $30k rent advance isn’t taxed upfront and can instead be apportioned over the three-year Futurerent agreement. 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.
How property investors can access capital without refinancing
By getting early access to your rental income with Futurerent, you can keep your existing mortgage in place and skip the painful refinancing process, painwork, and assessment criteria. You can also generally do what you want with the money without changing the tax treatment on the interest you pay on your investment property loan (reminder - this is not financial advice and you should always consult a professional!)
One key difference between refinancing and Futurerent is that Futurerent mainly looks at your rental income. This means you’ll generally only need two documents: your lease agreement and property management contract – which we get from your property manager – so you can skip the paperwork.
As a property investor, your time is already precious. Ensuring properties are occupied and maintained is hard enough without banks asking for endless documentation during a long and frustrating process.
At the same time, you have to deal with rising costs for bills, contractors, and administration. So why waste more on interest when you can access rent upfront, with less fuss and less expense?
Want to see how Futurerent can help you? Head to our calculator to see how much rent you can access.
FAQs
1. How does Futurerent differ from refinancing?
Futurerent gives you rental income upfront, bypassing the serviceability assessments required by banks and not impacting your credit. Unlike refinancing, with Futurerent all you need is a valid lease agreement and property management contract (in some cases we will ask for some additional information but we keep the paperwork at a bare minimum).
2. Can Futurerent work for investors with complex income structures?
Futurerent is only concerned with your rental income. We also help clients who own their investment properties in companies or trusts.
3. What are the key benefits of using Futurerent?
Futurerent offers a fast, simple alternative to borrowing without all the paperwork or impact on your credit. You can access up to $100,000 of rent upfront more efficiently than refinancing your entire loan, potentially saving you time and money depending on your circumstances.
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