However, the process for obtaining an affordable mortgage also depends on the ultimate goal you have in mind for the purchase. In particular, it matters whether you're buying the property with the intention to make it your home or as an investment.
Here's a look at each option and what it means for your home loan application process.
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.
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 mortgage, variable rates, fixed 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.
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.
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.
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 occupancy fraud. That's because 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.
There are better ways to ensure you're obtaining the best possible rates for your mortgage if you're purchasing an investment property. Even though Australia's banks and lenders have been tightening up their requirements for investment loans, you can take measures to increase your borrowing capacity and apply for the correct type of funding to support your property ambitions.