It’s possible to rent out a house straight after buying it, you’ll just need to pick the right type of home loan.
If you’re looking at renting your property out straight after buying it, you’ll need to get the right type of loan. And by that, we mean choosing an investor home loan. This not only ensures you’re in the right type of home loan, but also gives you a few benefits that property investors in Australia can claim when it comes to tax.
There are one of two scenarios you’ll probably find yourself in if you buy a house and realise you want to rent it out.
If you’ve approached the purchase from the outset with the intention of renting it out straight away, you’ll want to choose an investment home loan. There are a few benefits in doing so:
Deductions: Having an investor home loan means you can claim back the cost of your home loan interest payment, bank charges, and repairs against your total income at tax time.
Interest-only home loans: Many investors choose interest-only home loans for a few years to keep repayments low while finding tenants.
Negative gearing: If the cost of maintaining your home, including loan repayments, outweighs the rental income received, you can negatively gear your property and claim this ‘loss’ back at tax time against your entire income.
If you live in your property for a while after settlement, and later want to switch to an investor home loan, this is possible but necessitates getting in touch with your lender to switch loan purposes. This is usually an easy process, and could involve tweaking your loan product and rate, as well as providing your lender some additional documentation to show your property is now investment.
As an owner occupier, you receive capital gains tax concessions as your property is your ‘primary place of residence’ if you live in it for at least a year.
If you switch from an owner occupier to an investment loan you’ll sacrifice this, but the benefits may outweigh the relatively marginal cost associated with paying capital gains tax without the concession.
There are a few things to consider before jumping into the world of property investment.
As mentioned earlier, there’s a few things to think about when becoming a property investor. The main two initial considerations are whether you’ll negatively or positively gear your property, and whether to pay interest-only or principal & interest payments.
Negatively geared properties are arguably more common in major cities as the loan repayments and outgoings outweigh the income derived from the rent, as reflected in the average rental yield figures usually being lower in capital cities. Conversely, capital gain has traditionally been stronger in hot markets such as Sydney and Melbourne - though this could change.
On the other hand, those in rural or regional areas may more commonly choose to positively gear and chase rental income, as opposed to chasing capital gain.
When your circumstances change, you’ll need to inform your lender if you’re switching between occupancy types. If this is during the application process, this is usually an easy and quick process, and may only require a few additional forms, such as a rental valuation.
If you don’t tell your lender about your change in circumstances, there could be penalties. If the lender finds out, and let’s face it, lenders know a lot about someone, you’ll be switched to an appropriate loan, potentially at the usual cost of refinancing. Long story short, lenders aren’t stupid, and switching to the appropriate loan is usually quick and easy.
If you’re ready to start your investment property journey, speak with one of our lending specialists today to find out how to get pre-approved for a home loan.
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