Home loans will fluctuate considerably depending on whether you’re buying a property to live in or purchasing one as an investment. As you can probably guess, the difference between owner-occupied residences and investment properties comes down to intended use. When you're buying a home or apartment you intend to be your personal home, it's called an owner-occupied property. If you plan to make money from the property, from renting it to tenants or to sell it at a profit, it's considered an investment.
But why are owner occupier loans so much more affordable? Prior to 2014, there was very little difference between owner-occupier and investor home loan rates.This however changed when the Australian Prudential Regulation Authority (APRA), announced it would set a 10% cap on new investor lending.This meant banks had to reduce the proportion of new home loan business going to investors to 10% of their total home loans. As a result of this change, lenders had to lift rates on property investment home loans creating a significant gap between owner-occupier home loan rates and investor rates, with investment loans 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 3.50 per cent interest. For investment mortgages, the interest rate for a comparable loan might be 3.81 per cent.As well as for an investment property loan you might need to put forward a larger down payment, 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.
One feature commonly available to investors that is now rarely offered to owner-occupiers is interest-only repayments. An interest-only repayment means that only the interest charges on the home loan are being repaid, so the amount you owe isn’t reduced. What is reduced, however, is the size of your monthly repayment.. At the end of this term, your home loan repayments would revert to principal and interest. This would mean a significant rise in your monthly repayments. Meanwhile, you would not have actually reduced the amount you owe. This type of loan is beneficial as an income-producing asset, it means any income they see from their investment is taxed by the Australian Taxation Office (ATO). It also means they can deduct any expenses incurred while generating that income. Because of this, investment property home loans are treated differently by the ATO than owner-occupier home loans. For tax purposes, the interest on an investment property home loan is seen as a business expense. Therefore, all interest payments can be deducted from the property owner’s income at tax time. Interest for an owner-occupier home loan, on the other hand, is not deductible. This tax treatment is why some property investors choose an interest-only home loan. Paying only the interest maximises their tax deductible debt while minimising their outgoings.
Before settling on a particular type of loan, evaluation of options should be conducted across multiple lenders. Each loan should be assessed on the financial impact of each interest rates, terms and payment. We would recommend speaking with a trusted loan advisor to assist in 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 in comparison to personal loans.
For a deposit, If a occupier home loan has already been established, the required value of the funds will most likely be higher for the investment 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.
It's very important not to misrepresent intentions for a property when applying for a home loan. Doing so may result in fraud charges, as 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.