Beginner's guide to refinancing for a lower rate

If you're paying more on your investment property loan than you need to, refinancing could cut your repayments without changing how much you owe.

The interest rate on your loan directly affects how much you pay each month and how much goes toward building equity rather than servicing debt. A reduction of even half a percentage point can add up when you're holding property long-term. For investors, that difference can mean the gap between cash flow that works and cash flow that doesn't.

Why investors refinance to reduce their rate

Investors typically refinance when their current rate no longer reflects what's available in the market. Lenders adjust their rates regularly, and the loan you took out two years ago might now sit well above what new borrowers are being offered. If you've been with the same lender for a while and haven't asked them to review your rate, there's a chance you're paying more than someone in an identical situation who just settled last month.

Another scenario we see regularly involves investors who initially used a higher-rate lender to get across the line. Perhaps serviceability was tight, or the property type required a specialist lender. Once you've held the loan for 12 to 24 months and your financial position has improved, refinancing to a lender with a lower rate becomes an option.

When a rate reduction makes sense

You'll want to compare your current rate to what's available now, factoring in the costs of switching. Most lenders charge a discharge fee to exit your existing loan, and there may be application or valuation fees with the new lender. If you're on a fixed rate and breaking early, there could be break costs involved, which we cover in more detail on our page about home loan refinancing.

Consider an investor holding a unit in Mount Waverley with roughly 80% of the original loan still owing. They're paying 6.2% variable. If they can refinance to a lender offering 5.7%, the difference in monthly repayments on a loan of that size would typically cover the switching costs within six to eight months. After that, the saving continues for as long as they hold the loan.

The question isn't whether refinancing costs money upfront. It does. The question is how quickly the lower rate offsets those costs, and whether the ongoing saving justifies the effort.

What lenders look at when you refinance an investment loan

Lenders assess your refinance application the same way they would a new purchase, with one key difference: you already own the property. They'll want to see your income, existing debts, living expenses, and the rental income the property generates. If the property is tenanted, you'll need a copy of the lease. If it's vacant, that affects how they calculate serviceability.

Your loan-to-value ratio also matters. If the property has increased in value since you bought it, or if you've paid down some of the loan, you might now sit at a lower LVR. That can open up access to lenders with more competitive rates or remove the need for lenders mortgage insurance on any top-up.

If your financial position has changed since you first borrowed, that works in your favour. A pay rise, reduced personal debts, or even a longer rental history on the investment property can all improve how lenders view your application. Investors often assume they're stuck with their original lender, but serviceability improves over time for most people, and that creates refinancing opportunities.

Switching from fixed to variable or splitting your loan

Many investors locked in fixed rates when they first bought, either because the rate was lower at the time or because they wanted certainty. If your fixed term is ending soon, refinancing lets you reassess whether fixing again makes sense or whether a variable loan now offers more flexibility and a lower rate.

Some investors split their loan, fixing part and leaving part variable. That gives you some protection if rates rise while still allowing extra repayments on the variable portion. It's not the right fit for everyone, but if you're holding the property long-term and want the option to pay down debt faster without penalty, splitting can work well. You can explore how changing your loan term affects repayments and interest over time using a calculator.

What happens if you want to refinance but your property value has dropped

This can happen with units in particular, or in areas where the market has softened. If your property is now worth less than when you bought it, your LVR has increased even if you've been making repayments. That can limit which lenders will accept your application or mean you're stuck with a higher rate than you'd like.

In that scenario, you might still be able to negotiate a rate reduction with your current lender rather than switching. It's not guaranteed, but if you've been making repayments on time and your loan is otherwise in good standing, some lenders will offer a discount to keep you. A broker can help with that conversation, particularly if you're not sure what rate you should be asking for.

How refinancing affects your investment loan structure

When you refinance, you're setting up a new loan. That means you can change the structure if it no longer suits your situation. You might switch to interest-only repayments if you're focused on cash flow, or move to principal and interest if you want to reduce debt. You can also add an offset account if your new lender offers one, which can reduce the interest you pay without locking funds away.

If you're planning to buy another investment property, keeping your loans separate makes it easier to manage deductions and track performance. Some investors consolidate all their debt into one facility, but that can create issues down the line if you want to sell one property and pay off part of the loan. The structure you choose now affects your options later, so it's worth thinking through before you settle. Our page on expanding your property portfolio covers loan structures in more detail.

Timing your refinance around tax and rental income

Investors often refinance after the end of the financial year, once they've lodged their tax return. That's because lenders want to see your most recent Notice of Assessment, and if you're relying on rental income to support serviceability, they'll want evidence of that income over time.

If your property has been tenanted for less than six months, some lenders won't accept the full rental income in their calculations. Others will, but they might apply a discount. Timing your refinance application so you have a full lease history and a recent tax return that includes rental income can make the difference between an approval and a decline.

Working with a broker to refinance your investment loan

A broker compares rates across multiple lenders and identifies which ones are likely to approve your application based on your income, property type, and LVR. That saves you applying with lenders who won't accept your scenario and potentially affecting your credit file.

Brokers also handle the paperwork, liaise with your current lender to arrange discharge, and coordinate settlement with the new lender. If you're juggling work, tenants, and managing the property itself, that removes a decent amount of admin from your plate. We work with investors across Melbourne and regionally, so whether your property is in Glen Waverley, Mulgrave, or further out, we can structure the refinance to suit your situation.

Call one of our team or book an appointment at a time that works for you.

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