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What makes refinancing so painful for property investors

Oct 12, 2021 |ALISON CHEUNG

Property investors are rushing into the housing market as interest rates stay low, but access to finance hasn’t become easier.

Lenders are seeing the highest investor demand since 2015, according to the ABS – a clear sign that investor sentiment is very strong. Yet on the other side of the coin, refinancing to access equity is still a struggle for most property investors.

With tighter lending rules recently announced by APRA, accessing finance is going to become even tougher from November 2021.

Who’s likely to have difficulty refinancing?

While topping up your mortgage sounds nice, you're actually taking out a new loan. This means banks need to reassess the risk of lending you more money under your current circumstances.

This can become complicated because the banks have an idealistic view of what the ‘perfect’ borrower is, and this is in stark contrast with reality. Your average borrower could be a couple with a baby on the way, a salesperson who works on commission, a small business owner, or someone in their twilight years – nothing out of the ordinary.

Unfortunately, according to the banks, not all income is 'equal’ and their policies struggle to account for short-term changes in someone’s situation.

What are the hurdles these property investors face?

So what does this mean if you're going through a short-term change in your life? Here are a few examples of what this could involve:

  • if a primary carer is taking a career break, banks could exclude their income regardless of when they plan on going back to work
  • banks could exclude any bonuses, or variable component of your income, like commissions
  • banks could exclude or discount investment related income, including rental income.

Also:

  • banks require two years of tax returns and business activity statements if you’re self-employed or own a small business
  • banks require superannuation statements and a clear written exit strategy if you’re aged 50+.

What does this mean for property investors?

Effectively, it means you'll have a harder time accessing credit because the banks don't think you can afford repayments, even if you believe you can. Think more documentation, more scrutiny and less borrowing capacity

Even if you get approved, you may also be facing a higher interest rate to compensate for the bank’s perceived 'risk'.

For example, if you’re paying 3% on a $500,000 loan and you refinance to access an extra $50,000, but because of your situation, your interest rate increases to 4%. This will cost you an extra $112,378 over the life of your loan.

Let’s run the numbers

At Futurerent, we’re big fans of simplifying access to finance for all property investors who want to fund their big dreams.

If you represent a higher risk to the banks, they will likely lift your interest rate by 1-5% more than the standard a regular refinancer.

What does this mean for you in dollar terms?

Let’s say your existing rate is 3% and you apply to top up your home loan by $50,000. Your bank approves but assesses you as a ‘risky’ borrower and lifts your interest rate to 4%.

Over the life of your loan:

  • at a 3% rate, you would have paid $291,817 in interest
  • at a 4% rate, you’d pay $404,196 in interest

So by stomaching a higher interest rate to access the additional $50,000, you’d be hit with an extra $112,378 in interest over the life of the loan.

To compare, if you used Futurerent to simply bring forward $50,000 of rental income, this would cost you $4,500 over 1.5 years, or if you want a longer 3-year repayment term, $9,000.

How property investors can access finance without refinancing

For property investors who are in circumstances making it difficult for them to refinance, accessing your rent upfront with Futurerent could be a smart move.

By getting early access to your rental income, you can bypass serviceability and LVR assessments from the banks. Futurerent doesn’t apply restrictions on how much you’ve borrowed against your property and how much equity you own.

One key difference between refinancing and Futurerent is that your rental income is the main thing Futurerent looks at. This means only two documents are required: your lease agreement and property management contract – which we get from your property manager – so you can skip the paperwork.

Want to see how Futurerent can help you? Head to our calculator to see how much rent you can access upfront.

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ALISON CHEUNG

Alison has written about property since 2015. Her work has been published by NewsCorp, Domain and Business Insider. Alison is motivated to help Australians make better property investment decisions.

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