Mozo guides

Understanding Investment Home Loans

Investor refinancing their home

If you’re a borrower who’s taken out a home loan for an investment property, you might find yourself looking at a loan that is missing out on a better interest rate or handy account features in comparison to others. If that’s the case, then it might be time for you to look at refinancing. 

Refinancing an investment home loan is a great way of making sure you’ve got a loan that’s working for you. In this guide, we look at the reasons you might want to refinance your investment property loan, how you can prepare, the process, and all the benefits and risks associated with refinancing an investment property.

Types of Investment Home Loans

When it comes to an investment home loan, the type of loan you get is entirely based on the style of repayment that works best for your situation. Investment home loans will generally be divided into variable rate, fixed rate, and split rate loans.

A variable rate investment loan is when the interest rate of the loan can be adjusted by the bank whenever there is a change in the cash rate. These loans will generally be at a lower rate than a fixed rate, however, they can rise or fall at inopportune times.

An investment loan with a fixed rate has an interest rate that is set for a period of time (generally 1-5 years). These kinds of loans are best for borrowers who need a period of certainty when it comes to their regular repayments—however, if rates have risen or fallen as the fixed period ends, then you might find yourself walking into even bigger or smaller repayments. 

Another type of investment home loan that borrowers can get is a split rate loan. These are loans where half of the repayment is done at a variable rate, while the other half is at a fixed rate. These loans can work well for first time borrowers as they offer the more stable repayment terms of fixed rates with the flexibility of a variable rate. However, borrowers who do not have enough room to move with interest rate hikes and cuts may be adversely affected by movements. 

Why Refinance an Investment Home Loan?

refinancing a home

There are a lot of reasons to refinance an investment home loan. Chief among them is disadvantageous interest rates. In the case that an investor finds that their loan has an unsatisfactory interest rate, borrowers might compare other home loan providers and refinance their investment home loan to improve their regular repayments.

Another way that borrowers can benefit from refinancing is by changing the loan repayment type to better take advantage of their repayment style. This could be switching from variable-rate to fixed-rate mortgages for greater stability or vice-versa to take advantage of features that may only be present in variable rate loans.

Another reason borrowers might want to refinance their investment home loan may be that there is a lack of advantageous features. Features such as free extra repayments and offset accounts are ways in which borrowers can actually reduce their interest rate and loan terms over time, thereby allowing them to save over the length of their loan. 

Overall, if you’re a borrower who is thinking of refinancing your investment home loan, it’s important to make sure that you compare between your current loan and the loan you plan on taking out. This way you can make sure that your refinanced loan provides a better deal overall.

Preparing for Refinancing

When refinancing a home loan, it’s important to make sure that you’ve properly prepared beforehand so you don’t get caught without the right documents and information needed. 

Check Your Credit Score

It’s important to know your credit score before refinancing your home loan as it can affect your loan. In general, a higher credit score leads to more favorable loan terms and interest rates which, over time, can mean that you end up paying less over the length of the loan. If your score is lower than desired, taking steps to improve it by paying bills on time, reducing debt, and correcting any errors on your credit report can help.

Gather Your Financial Documents 

Lenders require various financial documents during the refinancing process. These typically include personal information and ID, home loan statements for your current loan, and documentation of any other assets you might own. It’s a good idea to gather this financial information in advance to make sure that the application process is much easier than it otherwise could be.

Shop Around for Lenders  

Instead of going for the first lender you come across, take the time to compare products from different lenders so that you can see what’s currently on offer from home loan providers. One easy way you can compare home loan offers is by using Mozo’s handy home loan comparison tools. When comparing home loans, make sure to look for competitive interest rates, favourable loan terms, and useful features. 

The Refinancing Process

refinanced houses and homes

Application and Approval

Once the application is submitted, the lender will review it along with your financial documents and a credit check. Lenders tend to assess borrowers to determine how risky/safe they are to lend to. If your application is approved, you will receive a new contract.

Closing and Funding

After the closing documents are signed and funds are disbursed, the refinancing process is complete. From this point forward, you will make mortgage payments according to the terms outlined in your new loan agreement.

Benefits and Risks of Refinancing

refinancing process for an investment home loan

Refinancing an investment property shares some similarities with refinancing other types of loans, but there are also specific benefits and risks associated with this type of transaction. 

Benefits of Refinancing an Investment Property

Refinancing can provide an opportunity to secure a lower interest rate on your investment property loan. This can result in reduced regular repayments for your loan which, in turn, means you’re spending less over the lifetime of the loan.

Another benefit to refinancing an investment property is that If you have multiple loans or debts (such as credit cards), refinancing can consolidate them into a single loan with a potentially lower interest rate. Overall, this can make managing your finances easier and potentially save on interest costs.

Risks of Refinancing an Investment Property

Refinancing an investment property tends to involve account closing costs, including application fees, appraisal fees, title insurance, and other associated costs. These fees can be substantial and may offset some of the potential savings from refinancing. It's essential to consider these costs when evaluating the financial benefits of refinancing.

Another thing to look out for when refinancing is that you’re not extending the loan term unnecessarily as this can result in higher interest costs over the long run. 

When looking at refinancing an investment property, make sure you look at both the benefits and risks involved. If you think that refinancing is right for you, then check out our home loans comparisons or, alternatively, you can check out our refinance page.

Investment Home Loan FAQ

When to refinance an investment home loan?

Generally, you should consider refinancing your investment home loan when you can get a better interest rate or a feature that will help to reduce your regular repayments.

How to refinance an investment home loan effectively

Make sure that you compare home loan providers beforehand as well as prepare any necessary documentation before the refinancing process begins as this will help the process go smoothly.

Do I need a good credit score to refinance my investment home loan?

Not necessarily. However, having a good credit score can mean that you would be given a more advantageous interest rate over a borrower that has a bad credit score.

Cameron Thomson
Cameron Thomson
Money writer

Cameron has a Bachelor of Creative Writing and History, and a background in broadcast media from his time at 2SER Radio. This diverse set of skills has informed his analytical yet creative approach to dissecting financial data and uncovering long-term trends in consumer finance. Cameron is RG146 certified for Generic Knowledge and keeps a keen eye on current and historical deposit and savings rates on the Mozo database. Cameron is also interested in tracking the investment space, particularly share trading platforms, to help Aussie consumers save and invest their money more wisely.