Why Should You Refinance an Investment Property?

Why Refinance an Investment Property?

Refinancing an investment property means replacing your current loan with a different one, usually to reduce costs, access equity, or improve loan features that affect your cashflow. Most investors refinance when their loan no longer matches their financial situation or when holding costs eat into returns.

In Toongabbie, where dual-income households and owner-occupiers make up a large share of the suburb, many property investors live locally while renting out a second property nearby or in neighbouring suburbs like Wentworthville or Pendle Hill. When fixed rates expire or interest charges climb, the weekly gap between rental income and mortgage repayments widens. Refinancing closes that gap without requiring a sale or tenant change.

Consider an investor with a two-bedroom unit in Toongabbie purchased a few years back. The original loan had a fixed rate that recently expired, and the revert rate pushed repayments up by over $400 per month. Rental income covers most of the mortgage, but the shortfall now requires topping up from personal income each month. Refinancing to a lower variable rate brought repayments down, and adding an offset account meant surplus rental income could sit against the loan balance, reducing interest without locking funds away.

Coming Off a Fixed Rate Period

When a fixed rate period ends, lenders typically move you to their standard variable rate, which is often higher than what new customers receive. This revert rate can add hundreds of dollars to your monthly repayment, and it applies automatically unless you act.

Investment properties are particularly exposed because the repayment increase comes straight out of your pocket if rent doesn't cover it. In Toongabbie, where median rents have stayed relatively stable while interest rates fluctuated, that gap can turn a positively geared property into one that costs you each month. Refinancing before your fixed rate expires locks in a lower rate and avoids the revert rate altogether. You can refinance up to six months before expiry, giving you time to compare options without the pressure of an imminent rate jump. For more on what happens when your fixed term ends, visit our page on fixed rate expiry.

Accessing Equity for Your Next Purchase

As property values rise, the equity in your investment property grows. Refinancing lets you access that equity without selling, which you can then use as a deposit for another purchase or to fund renovations that increase rental yield.

Lenders typically allow you to borrow up to 80% of the property's current value without needing mortgage insurance. If your property has increased in value or you've paid down the loan, that leaves usable equity. In a scenario like this, an investor in Toongabbie with a property now valued higher than the original purchase price could refinance to release equity and use it as a deposit on a second investment property. The rental income from both properties then contributes to the loan repayments, and the investor builds equity across two assets instead of one. Structuring the loans separately keeps each property independent, which matters if you later sell one or need to adjust your strategy. For more on using property for investment purposes, visit our page on investment loans.

Switching Loan Features to Improve Cashflow

Investment loans often come with fewer features than owner-occupier loans, and some investors accept a basic loan at purchase without realising how much those missing features cost them over time. Refinancing lets you add an offset account, redraw facility, or flexible repayment options that improve cashflow and reduce interest.

An offset account is particularly useful for investors who receive rent in one lump sum and pay expenses irregularly throughout the month. Keeping rental income in the offset account reduces the daily interest calculation on your loan without losing access to the funds. Redraw facilities let you make extra repayments and withdraw them later if needed, which helps when managing multiple properties or covering unexpected repairs. Some lenders also allow interest-only periods, which lower your monthly repayment and free up cash for other investments or expenses. Each feature has a different impact depending on your situation, and not all lenders offer the same combination. A loan health check can show which features would actually reduce your costs based on how you manage rental income and expenses.

Consolidating Debt into Your Investment Loan

If you're carrying personal debt with high interest rates, refinancing your investment property can let you consolidate that debt into your mortgage at a lower rate. This reduces your total interest charges and simplifies repayments into one monthly amount.

The challenge is that consolidating debt into an investment loan affects the tax deductibility of that portion of the loan. Interest on borrowing used for investment purposes is tax deductible, but interest on borrowing used for personal purposes is not. If you refinance and consolidate personal debt, you need to keep clear records of which portion of the loan relates to the investment property and which relates to the personal debt, because only the investment portion remains deductible. In our experience, investors who consolidate without structuring it properly lose thousands in deductions over the life of the loan. The refinance still saves money overall if the interest rate drop is large enough, but it requires careful calculation upfront. Your accountant and broker should work through the numbers together before you commit.

When Refinancing Doesn't Make Sense

Refinancing isn't always the right move, even if a lower rate is available. Break costs on fixed loans can outweigh the interest savings, especially if you're only a year or two into a fixed term. Application fees, valuation costs, and discharge fees also add up, and if you're planning to sell the property within the next year or two, those costs might not be recovered.

Another scenario where refinancing may not help is when your loan balance is very low. Lenders often have minimum loan amounts, and the effort involved in switching might not deliver enough savings to justify the process. If your investment property is negatively geared and you're using the loss to offset other income for tax purposes, refinancing to a lower rate reduces that loss, which could actually increase your tax bill depending on your marginal rate. That doesn't mean you shouldn't refinance, but it does mean you need to look at the full financial picture, not just the interest rate. For a full review of whether refinancing suits your situation, visit our page on refinancing.

The Refinance Process for Investment Properties

Refinancing an investment property follows a similar process to refinancing an owner-occupier loan, but lenders assess rental income and property type more closely. You'll need to provide recent rental statements or a lease agreement showing current rent, and the lender will calculate how much of that income they'll accept as part of your borrowing capacity.

Most lenders apply a rental income discount of around 20% to account for vacancy periods and maintenance costs, so even if your property is fully tenanted, they'll only count 80% of the rent. You'll also need a property valuation, which the lender arranges. If the valuation comes in lower than expected, it can reduce the amount you're able to borrow or mean you can't access as much equity as planned. In Toongabbie, where property types range from older fibro units to renovated brick homes near Toongabbie Public School, valuations can vary depending on condition and location within the suburb. The application itself takes a few weeks, and you'll need to coordinate settlement so there's no gap between your old loan and your new one.

Call one of our team or book an appointment at a time that works for you to review your investment loan and work out whether refinancing puts you ahead.

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