What is the difference between an investment loan and an owner-occupied loan?
The terms ‘investment home loan’ and ‘owner-occupied home loan’ both refer to the loan facility that allows you to borrow money to purchase a property.
The key difference between the two is the purpose of the property being purchased:
- Owner-occupied loans are for people purchasing a home to live in;
- Investment loans are generally for people purchasing a property to rent out and earn an income.
Lenders typically consider investment loans riskier than owner-occupied loans due to the extra uncertainty of the rental market.
There’s a risk investment properties may sit vacant for a time, thereby not generating any income for the owner to put towards mortgage payments. Likewise, an investment property owner may face extra expenses such as property management fees.
Finally, it might be assumed that a borrower, if faced with a choice, is more likely to default on a loan for an investment property than on a loan attached to their home.
For these reasons, investment loans tend to come with stricter conditions and higher interest rates than owner-occupied loans.
How do owner-occupied home loans work?
When you apply for a home loan, a lender will inquire about your income, assets, and debts to understand your finances and determine your borrowing power—the amount of money it might be willing to lend you.
When taking out a home loan, you will be required to pay the loan principal, along with interest. This can be charged at a fixed or variable rate, or you can choose to split the loan with each portion attracted a different interest rate. You may also have the option to take out an interest-only loan.
When taking out a home loan, you will usually be required to pay a deposit. In general, 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).
Several lenders also allow you to select a guarantor, who may provide equity in their home as extra security for your loan, which can count towards the upfront deposit you might otherwise need to provide.
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 buy and the likelihood that the property will appreciate.
Because lenders view investment loans as riskier, interest rates can be higher, and loan-to-value ratio (LVR) thresholds may be lower, meaning your deposit may need to be larger.
Depending on the lender, 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. You might be able to use a guarantor for an investment loan too.
Interest rates
Lenders generally consider investment loans riskier, meaning the interest rates attached to them tend to be higher.
When considering your application, lenders will take into account factors like your credit score, the size of your deposit, and your financial situation. If they consider you a secure borrower, you may be able to negotiate a lower interest rate.
If you’re considering purchasing an investment property, you can compare investment home loan rates with Canstar.
Loan to value ratio
LVR is the difference between the amount you’re borrowing to buy a property and that property’s market value. For instance, if you’re buying a $1 million property with a $100,000 deposit, you would be left with a 90% LVR. If you had a $200,000 deposit, your LVR could be 80%.
Because lenders tend to view investment loans as riskier, LVR limits tend to be lower, meaning the deposit required may be higher than if you were purchasing the property as an owner-occupier. As mentioned earlier, 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, you do. 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 discuss your options for 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 lead to serious penalties.
It’s also important to note that, when applying for a home loan, you must specify whether you intend to be an owner-occupier or rent it out. ‘Occupancy fraud’, also known as ‘mortgage fraud’, occurs when a borrower claims that their property will be owner-occupied, potentially to get a lower interest rate, but rents the property out instead.
If a borrower commits occupancy fraud by lying about the property’s purpose, the lender might ‘call in’ the loan, which could result in a forced sale of the home.
How to get a loan to buy a house
There are several ways you could go about taking out a home loan. You could approach a bank or lender directly and apply, or engage the services of a mortgage broker who can recommend a lender or loan product for your needs.
Either way, when applying for a home loan, you will need to supply your bank or lender with some key information and documentation, which will likely include:
- Identification documents
- Proof of employment
- Details of your income and assets
- Details of your debts and expenses
- Details of the property you intend to buy or build.
For more information about the home loan application process, you can use our home loan application checklist as a guide.
