Owner-occupied vs investment property

ALASDAIR DUNCAN
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.

In this article, we’ll answer the questions:

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.

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).


Compare Home Loans with Canstar

The comparison table below displays some of the variable rate home loan products available on Canstar’s database for first home buyers with links to lenders’ websites. The products displayed are based on loan amounts of $350,000, $400,000 and $500,000 at 95% LVR in NSW, available for principal and interest repayments. The results are sorted by comparison rate (lowest to highest), then by provider name (alphabetically). Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loans comparison selector to view a wider range of home loan products. Canstar may earn a fee for referrals.


*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

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 circumstances, 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 Home Loans with Canstar

Lowest interest rates for 1-year fixed home loans

The comparison table below displays some of the 1 year fixed rate investment home loan products on Canstar’s database with links to lenders’ websites available for a loan amount of $350,000 at 80% LVR in NSW, and available for Principal and Interest repayments. The results are sorted by comparison rate (lowest to highest), then by provider name (alphabetically). Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loans comparison selector to view a wider range of home loan products. Canstar may earn a fee for referrals.