If you are applying for a home loan, whether the house will be owner-occupied or an investment property will have a big impact on the process and the kind of loan you end up with.
There are a number of reasons you might buy a property – you might be looking for a home for you and your family to live in, you might be looking for an investment that you can use to collect a rental income, or you might even be a first home buyer who is interested in exploring rentvesting. Whatever the reason, there are different types of loans available for owner-occupied and investment properties, and it’s important to understand the difference.
What is the difference between an investment loan and an owner-occupied loan?
The terms ‘investment loan’ and ‘owner-occupied loan’ both refer to amounts of money that you can borrow to purchase a property. The key difference is the property’s purpose – owner-occupied loans are for people who wish to purchase a home to live in, while investment loans are typically for people who wish to purchase a property and rent it out to tenants to make an income.
Another key distinction is the fact that lenders generally consider investment loans to be riskier than owner-occupied loans. This is largely because of the fact that the rental market can be uncertain. There is a risk that investment properties may sit vacant for a time, thereby not generating any income for the owner to put towards mortgage payments. Likewise, the owner of an investment property may face extra expenses in relation to such things as property management fees and landlord insurance.
For this reason, investment loans tend to come with stricter conditions and higher interest rates than owner-occupied loans.
How do owner-occupied loans work?
When you apply for a home loan, lenders will make inquiries about your income, assets and any debts you may have in order to get a picture of your finances and determine your borrowing power, which is the amount of money they might be willing to lend you.
Calculate your borrowing power
When you take out a home loan, you will be required to pay back the principal of the loan, along with interest. This can be charged at a fixed or variable rate, or you can choose to split between the two. You may also have the option to take out an interest-only loan.
When you take out a home loan, you will typically be required to pay a deposit. In general terms, at least 20% is preferred for a home loan deposit. If you are borrowing more than 80% of the value of the property, you will typically be required to pay lenders mortgage insurance (LMI).
How do investment loans work?
The process of applying for an investment loan is much the same as applying for an owner-occupied loan, however, lenders will also consider other relevant factors that may affect your borrowing power. These include the potential rental income from the property you plan to purchase, and the likelihood of the property appreciating in value. There are certain other key differences in terms of the features of the loan itself. Because lenders view investment loans as riskier, the interest rates attached to them can be higher and the loan to value ratio (LVR) can be lower, meaning your deposit will likely be larger. Depending on the lender and your circ*mstances, you may be able to use the equity in a property you already own (your family home, for example) to fund the purchase of an investment property, instead of paying a cash deposit. There can be risks to this approach, however, so getting some financial advice before you commit could be wise, particularly if you are a novice property investor.
Interest rates
In 2017, the Australian Prudential Regulation Authority (APRA) cracked down on investment lending, in particular on interest-only investment loans, in an attempt to rein in rising property prices. These restrictions were later rolled back, but they did lead to a raise in interest rates at the time. This, coupled with the fact that lenders generally consider investment loans to be riskier, means that the interest rates attached to them tend to be higher.
When considering your application, lenders will take into account such things as your credit score, the size of the deposit you have saved, and your overall financial situation. If they consider you a secure borrower, you may be able to negotiate a lower rate.
If you’re considering purchasing an investment property, you can compare investment home loan rates with Canstar.
Compare investment home loan rates
Loan to value ratio
Loan to value ratio is the maximum proportion of the value of your home that can be loaned out to you. For example, a bank may approve your loan for 80% of the property value, which means you will be required to pay the remaining 20% as your deposit.
Because lenders tend to view investment loans as riskier, the LVR tends to be lower, meaning the amount you will need to pay as a deposit may be higher than if you were purchasing the property to live in yourself.
Note once again, though, that depending on the lender, it may be possible to use the equity in a property you already own to fund the purchase of an investment property, instead of paying a cash deposit.
Do you need to tell your lender if you plan to move out of your owner-occupied home and rent it out?
Yes, if you wish to move out of your owner-occupied home and turn it into a rental property, you will need to inform your lender that you plan to use the property as an investment. Generally speaking, your lender will then discuss your options in terms of switching your home loan to an investment loan, which will likely have a different interest rate and features. Failure to inform your lender that you are making this change can have potentially serious consequences.
It is also important to note that, when borrowing money for a home loan, you must be upfront with your lender about whether you intend to be an owner-occupier or rent it out. ‘Occupancy fraud’, otherwise known as ‘mortgage fraud’, occurs when a borrower claims that their property will be owner occupied, potentially in order to get a lower interest rate, but rents the property out instead.
Lenders typically charge higher interest rates for investment properties than for owner-occupied ones, as they consider these types of loans to be riskier. If a borrower misrepresents themselves and commits occupancy fraud by lying about the purpose of the property, the lender might ‘call in’ the loan, which could result in a forced sale of the home.
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