Owner-Occupied vs Investment Loans Explained
Owner-Occupied vs Investment Loans Explained
When purchasing property, one of the first questions a lender or mortgage broker will ask is whetherthe property will be your home or an investment.
This is not simply an administrative question. The intended use of the property can affect the type ofhome loan you apply for, the interest rate available, the lender’s deposit requirements and how yourborrowing capacity is assessed.
Understanding the difference between an owner-occupied loan and an investment loan can help youmake a more informed decision before applying.
What Is an Owner-Occupied Home Loan?
An owner-occupied home loan is generally used to purchase or refinance a property that you intend tolive in as your principal place of residence.
This may include:
Purchasing your first home
Buying a larger home for your family
Downsizing to a smaller property
Refinancing the mortgage on the home you currently live in
Building a home that you intend to occupy
The key consideration is that the property is primarily being used as your home rather than beingpurchased to generate rental income.
What Is an Investment Home Loan?
An investment home loan is generally used to purchase or refinance a property that will be rented totenants or otherwise held as an investment.
Investment properties may provide rental income and the possibility of capital growth, but propertyvalues and rental returns are not guaranteed.
Investors must also account for expenses such as loan repayments, council rates, insurance,maintenance, property management fees and periods when the property may be vacant.
It is important not to rely entirely on rental income to cover mortgage repayments, as a property maynot always be occupied and unexpected expenses may arise.
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Owner-Occupied vs Investment Loans: Key Differences
Feature
Owner-Occupied Loan
Investment Loan
Property use
The borrower intendsto live in the property
The property is intended to produce rental incomeor be held as an investment
Interest rate
May have differentpricing from aninvestment loan
May be priced differently due to lender policiesand risk assessments
Deposit
requirements
Depend on the lender,property and borrower
Some lenders may require a larger deposit orapply different lending criteria
Rental income
Generally notapplicable
A lender may consider a portion of expected orexisting rental income
Repayment
options
Principal and interestor, in some cases,interest only
Principal and interest or interest only, subject tolender approval
Tax
considerations
Home loan interest isgenerally private innature
Some interest and property expenses may bedeductible, depending on how borrowed funds areused and the borrower’s circumstances
Exact interest rates, fees, loan-to-value ratio requirements and lending policies vary between lenders.
Approval will also depend on the borrower’s income, expenses, existing debts, credit history, propertyand overall financial position.
Are Investment Loan Interest Rates Higher?
Investment loans may have different interest rates from owner-occupied loans, but there is no singlerule that applies to every lender or borrower.
The rate offered can depend on factors such as:
Whether repayments are principal and interest or interest only
The loan-to-value ratio
The loan amount
The borrower’s financial circumstances
The type and location of the property
The lender’s current pricing and credit policies
A lower advertised interest rate does not automatically mean a loan will have the lowest overall cost.
Application fees, package fees, ongoing fees, discharge fees and useful features such as an offsetaccount or redraw facility should also be considered.
It is important to compare the interest rate, fees, features and expected overall cost before selecting aloan.
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How Is Borrowing Capacity Assessed?
For both owner-occupied and investment loans, the lender will assess whether the borrower appearscapable of meeting the proposed repayments.
The lender may consider:
Employment and income
Living expenses
Credit cards and personal loans
Existing mortgages
Dependants
Credit history
Available deposit or equity
The proposed loan term and repayment type
For an investment loan, the lender may also consider expected or existing rental income.
However, lenders may not use the full rental amount when assessing borrowing capacity. Each lenderapplies its own policies, calculations and allowances.
A mortgage broker can help you understand how different lenders may assess your income,commitments and proposed property purchase.
Principal and Interest vs Interest-Only Repayments
Both owner-occupied and investment loans may offer principal-and-interest or interest-only repaymentoptions, depending on the lender and the borrower’s circumstances.
With
principal-and-interest repayments
, each repayment reduces the amount borrowed while alsocovering interest.
With an
interest-only loan
, repayments generally cover only the interest for a defined period. Theoriginal loan balance does not reduce during that period unless additional repayments are made.
Once the interest-only period ends, repayments will generally increase because the borrower mustbegin repaying both principal and interest over the remaining loan term.
Interest-only loans can also result in more interest being paid over the full life of the loan.
An interest-only structure should therefore be considered based on the borrower’s objectives,repayment strategy and ability to manage future repayment increases.
Are Investment Loan Expenses Tax Deductible?
Certain interest and expenses associated with a rental property may be tax deductible where theproperty is used to produce assessable rental income.
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However, deductibility generally depends on how the borrowed money is used rather than simply whichproperty secures the loan.
Private expenses and money used for personal purposes may not be deductible.
Tax rules can be complex, particularly when a loan has been refinanced, redrawn, split or used for bothprivate and investment purposes.
Borrowers should obtain advice from a registered tax agent or suitably qualified tax professional beforemaking decisions based on potential tax outcomes.
What Happens if the Property’s Use Changes?
Your circumstances may change after your loan has been established.
For example:
You may move out of your home and rent it to tenants
You may move into a property that was previously rented
You may purchase a new home and retain your former home as an investment
Part of the property may begin producing rental or business income
You should accurately disclose the intended use of the property when applying for a loan and contactyour lender or mortgage broker if that use changes.
The change may affect the loan’s pricing, features, lender requirements or tax treatment.
Changing the way a property is used can also affect its capital gains tax treatment, so professional taxadvice may be required.
Which Loan Type Is Right for You?
The correct loan classification is primarily determined by how you genuinely intend to use the property.
An owner-occupied loan may be appropriate when the property will be your principal home. Aninvestment loan may be appropriate when the property will be rented or held to generate investmentincome.
The right lender and loan structure will depend on more than the property classification.
Your income, expenses, deposit, existing debts, future plans and preferred loan features should all beconsidered.
Speak With Homefront Mortgages
Whether you are purchasing a home, buying an investment property or reviewing an existingmortgage, Homefront Mortgages can help you understand your available options.
We can discuss your circumstances, explain relevant loan features, compare suitable options availablethrough our lender panel and assist throughout the application process.
The final lending decision, interest rate and loan terms are determined by the lender.
Important Information
This article provides general information only and does not constitute personal financial, tax or legaladvice. It does not take into account your objectives, financial situation or individual needs.
Before acting on this information, consider your circumstances and obtain appropriate professionaladvice.
Loan approval is subject to lender assessment, eligibility requirements, satisfactory documentation andapplicable lending criteria. Interest rates, fees, terms and conditions may change. Fees and chargesmay apply.
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