Owner-occupier vs investment loans

Owner-occupier vs investment loans
What’s the difference between an owner-occupied home loan vs investment loan? If you’re considering taking out an investment loan for a second property, start here.
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Are you looking to switch your owner-occupied property into an investment, or move into your investment property? Find out how below.

It’s safe to say housing is very popular in Australia, with a sizeable portion of people with an investment property. Another sizeable portion are also at least thinking about an investment property.

However, if you’ve got a home loan attached to your property, you probably can’t just start renting it out, or move into your investment without telling anyone!

As the names imply, the difference between owner-occupied residences and investment properties comes down to what you intend to do with them. When you're buying a home or apartment you intend to live in, it's called an owner-occupied property. If you plan to rent it to tenants, it's considered an investment.

Investment loan vs home loan

As the names imply, the difference between owner-occupied residences and investment properties comes down to what you intend to do with them. When you're buying a home or apartment you intend to live in, it's called an owner-occupied property. If you plan to rent it to tenants or flip it, it's considered an investment.

Some people may choose to live in a home for a while and then rent it out after moving somewhere else, such as when their finances permit a transition or their careers compel them to relocate. Others may purchase a building and lease it to tenants initially, planning to move in themselves at a later date. However, if you follow this path and want to refinance your mortgage as an owner-occupier home loan, you may need to live there a set period of time before you can make the transition.

What if you purchase a property with more than one flat or apartment? If it has four or fewer units, it's typically considered owner-occupier as long as you live in one of them.

What it means for your home loan

Why does it matter? When you're applying for home loans to help you buy a house or to refinance an investment property, you'll need to specify whether you're applying for an owner-occupier loan or an investor loan. The distinction will most likely change the rate at which you'll be charged interest, whether you go with an offset mortgagevariable ratesfixed home loan or construction financing.

Investment loans are typically the more expensive of the two, both in terms of interest rates and additional closing costs, such as the appraisal fee. For example, a variable interest home loan for an owner-occupier might be available at 3.39 per cent interest. For investment mortgages, the interest rate for a comparable loan might be 3.79 per cent. If you’re looking for the cheapest investment home loan, look for lenders that don’t charge high closing fees and ongoing fees, such as loans.com.au. Make sure to check the specifications

Furthermore, you might need to put forward a larger down payment for an investment home loan, meaning your maximum loan-to-value ratio (LVR) will be higher. In Australia, many major banks and other lenders have recently lowered the maximum LVR and raised interest rates for investor home loans in response to concerns that the lending rate for this type of mortgage is growing too quickly.

How to get a loan to buy a house

When you apply for a home loan to purchase a house, you'll need to provide information about the value of the asset, your income and liabilities such as existing debt. Lenders will evaluate these details and other considerations, including credit history, for the amount you intend to borrow and the type of loan you're looking to obtain.

Before settling on a particular type of loan, you should evaluate your options and compare rates with multiple lenders. Mortgage providers such as loans.com.au that operate entirely online can often offer better rates by cutting overhead expenses. Additionally, you should assess the financial impact of different interest rates, terms and payment plans using a loan calculator so you can choose the option that best suits your economic situation and goals. Speak with a trusted loan advisor if you need assistance evaluating your choices.

After you submit your application for a mortgage, the lender will contact you to discuss your eligibility, options and any other information you need to provide. For instance, you may be required to submit financial statements from the last few years, pay slips, tax documents, proof of sale of your property and documentation for your current assets and liabilities.

How to get a home loan for an investment property

For investor home loans, the requirements can be a little stricter, especially now that many banks and lenders have raised the bar on their stress tests and other criteria for non-owner-occupied properties. You'll need to demonstrate that you have a certain amount of money set aside to manage the mortgage. If you already have an investment loan, the required value of the funds set aside might be higher than if it's your first home loan. This will typically be evaluated in terms of a certain number of months of mortgage repayments for each property.

The amount you'll likely receive in rental income can also be a consideration for investment loans, since you might be able to cover the cost of your mortgage repayments and other expenses with this income. That means the investment might not actually lower your debt-to-income ratio (the percentage of your monthly income that's put towards repaying your mortgage), which is one of the factors in the loan approval process.

Mortgage lenders also take into consideration the potential appreciation of your property over the course of the home loan. Both you and they may want to review information about vacancy rates for the area or property as well as trends in housing prices. These factors will come into play when you have your property valued.

How to live in your investment property

Lifestyle changes, kids leaving the nest, whatever the reason, it’s common for people to want to live in their investment property after a while. However, you likely can’t just move in - you’ll need to tell your lender first.

The bonus is that owner-occupier rates are often lower than investment loan interest rates. Plus, if you haven’t reviewed your home loan rate in a while, you could be paying too much. Switching to an owner-occupier loan is usually pretty straightforward, especially if it’s with the same lender, as they know who you are and your financial standing.

However, if you follow this path and want to refinance your mortgage as an owner-occupier home loan, you may need to live there a set period of time before you can make the transition.

How to turn your home into an investment property

Some people may choose to live in a home for a while and then rent it out after moving somewhere else, such as when their finances permit a transition or their careers compel them to relocate. However, there’s a few things you should know before refinancing to an investment loan.

Investment loans are typically the more expensive of the two. If you’re looking for the cheapest investment home loan, look for lenders that don’t charge high closing fees and ongoing fees. Furthermore, you might need to put forward a larger down payment for an investment home loan, meaning your maximum loan-to-value ratio (LVR) will be lower.

The amount you'll likely receive in rental income can also be a consideration for investment loans, since you might be able to cover the cost of your mortgage repayments and other expenses with this income - this is called a ‘positively geared’ property.

On the flipside, investment loans commonly come on interest-only payments. Interest-only loans are popular because it allows the investor to minimise costs while establishing themselves, and in some cases write-off the interest portion against their income if they’re making a rental loss - called ‘negative gearing’.

Investment properties can come with a range of extra considerations than owner-occupied properties. You might have to be willing to do a bit of extra market research, such as looking at vacancy rates for the area or property, as well as trends in housing prices, and typical rental yields.

Choosing the right home loan for your goals

It's very important not to misrepresent your intentions for a property when applying for a home loan. Because of the differences in rates, it might be tempting to try to obtain an owner-occupier mortgage no matter what, but loan agents are trained to evaluate whether their borrowers are committing what’s called ‘occupancy fraud’.

The differences in rates come down to the amount of risk that tends to accompany each type of home loan. With investment properties, there tends to be a greater chance of default, and therefore more exposure for the lender, among other factors.

There are better ways to ensure you're obtaining the best possible rates for your mortgage if you're purchasing an investment property. No matter what type of loan you require, the same tried-and-true tips apply: pay down your existing debts, improve your credit score, and show you can pay off a mortgage.

If you’re ready to move into your investment property, or turn your home into an investment, speak with one of our lending specialists today to talk about refinancing.

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