Refinance in 2025: Why You Should Start Preparing Now

According to the August 2024 Monetary Policy Report published by the Reserve Bank of Australia (RBA), inflation has fallen substantially since its peak in 2022. Higher interest rates have been instrumental in bringing aggregate demand and supply closer to balance. The RBA’s target inflation range is 2-3%, and as of now, inflation is sitting at approximately 3.9%. The next cash rate decision is scheduled for 24 September, and the question, “Will interest rates finally come down in 2024?” may still have a negative answer. Despite the RBA holding its cash rate in August, many banks are becoming more optimistic about the market and have started to reduce their interest rates.

For instance, one of our doctor clients recently purchased a property. ANZ offered him 6.72% for his new loan and refinance, while CBA presented an offer of 6.04% – 6.16% to retain his existing loan. This illustrates that unless you initiate the refinancing process, your bank is unlikely to offer a more competitive rate to keep you as a client.

However, before embarking on a refinancing journey, it’s essential to consider the potential tax implications. Factors such as the cost of refinancing and the eligibility for tax deductions on those costs should be carefully evaluated to ensure an informed decision. In this article, we’ll explore the benefits of refinancing, and the tax considerations involved, providing you with the knowledge needed to navigate the evolving Australian financial landscape with confidence in the 2025 financial year.

What Does Refinancing Mean?

Refinancing your home or investment property loan involves a straightforward concept: replacing your existing loan with a new one. This process entails paying off your current loan by securing a new loan that offers more favourable terms, such as a reduced interest rate, lower monthly payments, or a repayment schedule that better aligns with your financial objectives. 

Many investors opt for refinancing as a strategic manoeuvre, aiming to save on interest expenses, tap into the equity accumulated in their properties, or adjust their loan terms to better suit their financial goals. 

Why Refinance?

Refinancing offers a range of advantages that can significantly impact your financial well-being. From lowering interest rates to accessing equity and enjoying new loan features, refinancing opens up opportunities for savings and increased flexibility. 

1. Lower Interest Rate: One of the most appealing benefits of refinancing is the opportunity to secure a lower interest rate. By refinancing at a lower rate, you can reduce your monthly repayments, potentially saving hundreds of dollars each month. You can use these savings for essential or non-essential expenses or continue paying at your previous repayment level to pay off your loan faster and save on interest in the long run.

2. Adjust Loan Length: Refinancing grants you the flexibility to adjust the length of your loan. If you wish to increase your cash flow or save for additional property investments, extending the loan term can provide relief. Conversely, if you have the means to do so, reducing the loan term can help you save significantly on interest over the life of the loan, even if it leads to higher monthly repayments. Assessing the impact on interest savings is essential to ensure this strategy aligns with your financial objectives.

3. Access to Equity: Home equity refers to the difference between the value of your home and the remaining loan balance. Refinancing allows you to tap into this equity, providing access to funds that can be used for various purposes. Whether it’s home renovations, a dream holiday, purchasing a car, or making further investments, leveraging your equity can help you achieve your financial goals. However, it’s important not to exhaust all your equity at once, as it can serve as a powerful negotiation tool with lenders and provide a buffer for unexpected expenses.

4. Utilise New Loan Features: Refinancing presents an opportunity to take advantage of new loan features offered by your lender. Features such as redraw facilities and offset accounts can provide greater financial flexibility. An offset account acts as a transaction account attached to your home loan, offsetting the balance and reducing the interest charged. On the other hand, a redraw facility enables you to make extra repayments and access them if needed, as per your lender’s discretion. While there may be some associated expenses, it’s important to weigh the potential savings against any additional costs to ensure it’s a beneficial option for you.

What is Required for Refinancing as a Business Owner?

Refinancing for a wage earner is straightforward. All you typically need are your payslips, and nowadays, banks also review your tax account to check for any outstanding tax liabilities. However, for business owners, it’s a different story altogether. To refinance a home loan or investment loan as a business owner, you’ll need several key documents and a clear financial overview. Lenders typically require proof of income through recent tax returns, profit and loss statements, and business bank statements to assess cash flow and the ability to service the loan.

Personal financial information, including bank statements, credit scores, and an asset and liability statement, will also be required. Business continuity is crucial, so you have to provide your business Tax Account and Integrated Client Account statements for the last 12 months from the business or the ATO portal. Loan statements from your current mortgage and property valuations are also important, as lenders evaluate your equity and loan-to-value ratio (LVR). Maintaining at least 20% equity in your property can help you avoid Lenders Mortgage Insurance (LMI) and improve your refinancing terms.

Lenders will closely evaluate your debt-to-income ratio and repayment history to ensure you can comfortably manage the refinanced loan. To strengthen your application, it’s important to minimise any existing debt. For instance, having no credit cards or maintaining a low balance on your credit card can improve your financial profile. Similarly, reducing or paying off car loans, personal loans, or avoiding them altogether can make a significant difference.

Cost of Refinancing: 

When considering refinancing your home loan, it’s essential to have a clear understanding of the associated costs. Refinancing fees can vary based on your unique circumstances and the financial institutions involved, so it’s crucial to inquire about this fee upfront. We will explore the common costs associated with refinancing below: 

1. Discharge Fees: Discharge fees are paid to your current lender as an administration fee for fully paying off your existing loan and preparing the necessary documentation. 

2. Application Fees: Application fees are charged by the new financial institution for processing your new loan application. 

3. Valuation Fees: To assess the value of the property offered as security, the new institution may charge valuation fees. 

4. Land Registration Fees: When refinancing, you’ll need to remove the existing mortgage from your current lender and register a new mortgage with the new lender. 

5. Lenders Mortgage Insurance (LMI): If your property has less than 20% equity, the new financial institution may require you to pay Lenders Mortgage Insurance (LMI). This insurance protects the lender against mortgage default. It’s important to note that even if you paid an LMI premium when you first obtained your current loan, you may still be charged LMI when refinancing.

6. Ongoing Fees: Certain mortgage products, such as packaged home loans, may include ongoing fees. 

7. Break Fees: If you currently have a fixed-rate home loan and choose to refinance during the fixed-rate period, you may be subject to break fees. Break fees compensate the lender for any loss of profit resulting from your decision to break the contract. 

By carefully considering these fees and conducting thorough research, you can make an informed decision about refinancing and ensure that the benefits outweigh the costs in the long run.

How to Claim Tax Deductions on Refinance Costs

When refinancing your loan, it’s important to consider the tax implications associated with these expenses for your investment property. By understanding the rules and guidelines, you can maximise your tax deductions and effectively manage your finances. 

1. Tax Deductions for Refinancing: If your total refinancing costs amount to less than $100, you can claim the full deduction in the same income year that you incurred them. This provides immediate tax relief for smaller expenses.

2. Borrowing Expenses Deduction Rule: When the total borrowing expenses exceed $100, the deduction can be claimed over the loan term or five years, depending on which period is shorter. This allows you to spread out the deduction and receive tax benefits over an extended period.

3. Immediate Deductions for Refinancing: In the event that you repay the loan within a period shorter than five years from the time it was taken out, you become eligible to claim a deduction for the balance of the borrowing expenses in the last year of repayment. This allows for a final tax benefit on any remaining expenses as you conclude the loan.

Example: Suppose you had borrowing expenses with Bank A and claimed deductions over a period of two years. In the third year, you decide to refinance your loan with Bank B. During the year of refinance, you can claim the remaining borrowing expenses from Bank A in one go, consolidating the deduction and optimizing your tax benefits.

Navigating the complexities of home loan refinancing, along with understanding the costs, tax implications, and potential benefits, requires expert guidance. We’ve seen time and again how clients and inexperienced mortgage brokers can compromise tax deductibility simply by failing to consult with their tax accountants. Improperly managing a refinance can lead to significant tax implications for your investment and business loans. We cannot stress enough the importance of consulting with property and business tax specialists to review and optimize your refinance plan. Yes, there is a cost associated with engaging a specialist tax accountant, but it is an investment that can return tenfold when your loans are structured correctly for maximum tax benefits.

We offer a 15-minute free consultation to discuss your tax, property investment and business needs. Book your complimentary consultation now.

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To ensure your refinancing process is seamless and beneficial, contact the Investax Tax Specialists today. Our team is here to help you navigate the complexities and make sure your refinancing is aligned with your financial goals. Don’t leave your tax deductions and financial future to chance—reach out now and let us help you make the most of your refinance.