The art of refinancing
Want to buy another investment property, but don’t quite have enough cash to meet the down payment? Refinancing your existing mortgage is another possibility.
Refinancing a mortgage is basically trading in your existing mortgage for another (usually bigger) one. This is how it usually works:
- Arrange with the bank for a meeting, and explain to them you want to refinance the mortgage. Its not uncommon for an investor/homeowner to go to refinance their mortgage with another bank. For instance, your existing mortgage might be with ANZ Bank and you decide to refinance your mortgage with BNZ. If this occurs, some of the new mortgage from BNZ will be used to pay off the existing ANZ mortgage and the money left over can be used as a down payment for another property.
- Bank personnel will explain to you what refinancing options are available. All the terms and conditions would be laid out on the table for you. Banks will always recommend that you to seek independent legal advice.
- The refinance process requires you to get a current valuation done on your property by a registered valuer. Get a registered valuer to revalue your property. Seagars and Prendos are very well known valuation companies.
- If you bought your property some five years ago, the new valuation will reflect reflect the increase in house price since you bought the property.
- When the bank has the valuation, and once you have completed the paperwork and all formalities, the bank can work out the new amount you can borrow.
- On the refinance date, the new mortgage will be drawn down and used to pay off the old mortgage. The difference can be used to purchase another property, spend on renovations or whatever you need to buy.
Here’s a basic example showing refinancing at work
Five years ago, the Egmond family bought a house in Dinsdale, Hamilton for $200,000. Their down payment was $50,000 and they took out $150,000 on an interest only mortgage. Recently, the house was revalued to $500,000. They decide to refinance the mortgage to tap into the equity and use some of it as a down payment for a property investment.
Equity is the difference between a property’s value and the amount you owe on it. Once the current house was revalued to $500,000; the Egmond family’s equity was $500000 – $ 150,000 = $350,000.
Under the new valuation of $500,000; the bank was willing to refinance the house at 75% loan to value ratio. At 75% loan to value ratio, the principal of the refinanced mortgage was $375,000. With this, the old mortgage of $150,000 was repaid and the difference of $225,000 ($375,000 – $150,000) can be used as a down payment for another investment property.
If Egmond family wanted to buy an investment propety in Auckland, they could use the $225,000 as a 30% deposit for another mortgage. That would mean they could buy a house up to $750,000 which is possible if they look at units or townhouses.
So that’s how refinancing could work in a nutshell.
If you would like to find out more, you should contact Gary Lin who is a property coach.
He understands the art of refinancing and combines that with the no-money down, positive cash flow property investing approach. As a property coach, he is willing to help you on your property investment journey and see you succeed.
Gary Lin can be contacted on 028 400 2820. Email Gary at Gary@ronovationz.com.