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Which is the better deal: refinancing, personal loans or upfront rent?

Aug 24, 2021 |ALISON CHEUNG

Any property investor who has refinanced their home loan will agree that it’s a painful process. So painful that it only makes sense to do it if the numbers really stack in your favour.

If you refinance your home loan to get a better deal, you’ll most likely be comparing interest rates to save money in the long term.

But if you’re a property investor refinancing to increase (or top up) your home loan, this isn’t necessarily going to be your best option, especially if you don’t need a huge amount of money.

What about personal loans? People generally use personal loans when they need fast access to money for a specific use, as lenders which provide these are typically more relaxed with their assessment criteria.

However, this will likely come at the expense of high interest rates, with the average unsecured personal loan rate at 14%, according to the RBA. Personal loans also come with a bunch of substantial fees, which can easily add thousands to your debt.

At Futurerent, we enable you to unlock up to $100,000 of your rental income, so you don’t have to get a new loan and deal with the banks.

Let’s run the numbers

When comparing refinancing and its alternatives, looking at interest rates alone can be misleading. This is because the repayment term is just as important. Banks love talking about the interest rates of refinancing but shy away from how long it takes to pay the entire loan off.

Confused? We’ll show you with real numbers.

Let’s say you need access to $25,000. You can choose to pay an interest rate of:

1) 3.42% per annum over 30 years – for an investor home loan top-up

2) 14% per annum over 5 years – for an unsecured personal loan

3) 6% per annum over 1.5 years – to access upfront rent with Futurerent over the shortest term.

Show me the money

Naturally, your eyes are drawn to the interest rate with the lower number. It can be tempting to bump that $25,000 onto your 30-year mortgage and pay it off along with the mortgage you’ve already got.

Let’s look at a second set of numbers, this time in dollar figures. Would you rather pay:

1) $15,370

2) $9,902

3) $2,250?

It’s not hard to guess which one most people would choose.

Option 1 – Pay $15,370

This is the amount of interest you’d need to pay if you topped up your mortgage by $25,000 and allowing the interest to accumulate over 30 years, based on the rates in the first set of numbers. Note that we haven’t included other refinancing costs, such as break costs, etc.

Option 2 – Pay $9,902

This is what you’d need to stump up in interest if you took out a 5-year personal loan of $25,000. While much cheaper than refinancing, this option will still set you back a hefty ten grand. Not to mention multiple charges from the lender, including establishment fees and monthly account-keeping fees.

Option 3 – Pay $2,250

The final option is your cost over 1.5 years if you access $25,000 of your rental income upfront using Futurerent. We only charge a single fee, so there’s nothing else you need to account for. Nada. You’ll also continue to receive ongoing rental income.

Avoid a lifetime of interest

On the surface, topping up your mortgage sounds like a set-and-forget approach, but that’s exactly what the banks want you to think. In that example, you’d be more than $13,000 worse off if you refinanced! You can also enjoy faster funding times and better flexibility than personal loans at about a fraction of the price.

So whether you’re looking to use the funds to invest in your business, buy another property or do a renovation, it’s important to crunch the numbers before making any financial decisions.

See how much you can save with Futurerent’s pricing comparison calculator.

Tips & Advice

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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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