Cash out refinance to buy an investment property

The alternative is one lender cross-securing both properties in a single loan, which is simpler to set up but ties the properties together, muddies the deductible and non-deductible interest, and makes it harder to sell one or refinance the other. Specialists structure it as a separate cash out split on the home for the deposit and costs, kept apart from the owner-occupied portion, plus a stand-alone investment loan on the new property. The tax position is clean and each property can be dealt with on its own later.

Twenty per cent of the purchase price keeps the investment loan at 80 per cent and avoids LMI on it. Add stamp duty, legal fees and a buffer, so 24 to 26 per cent of the price is a typical release. On a $700,000 investment purchase that is roughly $170,000 to $180,000 of cash out from the home, which requires the home to have that much equity under the 80 per cent rule and the borrower to service the combined debt.

Lenders add 75 to 90 per cent of the expected rent to your income for the investment loan, deduct the new repayments on both loans at the buffered rate, and include the investment property's expenses. Negative gearing benefits are counted by some lenders and not others. Where the investment property is not yet chosen, lenders will approve the cash out with a generic purpose of investment purchase and may set a time limit to use it.

Release the equity first and hold it in an offset against the cash out split, then get the investment loan pre-approved, then buy. The cash out settles before you need it, the deposit is ready on exchange, and interest on the released funds only starts costing you once they are used. Do not put the released cash into the home loan's redraw and mix it with personal money, because that complicates the deductibility.