Owner-occupier loan: is there a penalty if I rent out my home?

There’s a number of reasons why you may want to turn your current owner-occupied home into a rental. You may be moving interstate for work, or you may have recently purchased a new home and decided to turn your current one into an investment. Whatever the reason, if you’re paying off a mortgage on the property you must let your lender know about this decision. You may face a penalty for renting out an owner occupied home without the correct kind of home loan.

If your lender finds out you have been untruthful about the purpose of your loan, you could face consequences and could potentially even lose your home.

How are owner occupier and investment home loans different?

Generally speaking, home loans for investors tend to be more expensive than those for owner-occupiers, because lenders tend to view investment home loans as slightly riskier. For example, if you are unable to find a tenant for your property and it sits vacant for a period of time, or if your tenant damages the property, you may find it more difficult to pay your mortgage. From a lender’s point of view, this makes you slightly riskier as a borrower.

For this reason, if you apply for an investment home loan you may find that the interest rate attached is slightly higher, or the maximum loan-to-value ratio (LVR) is slightly lower. This means you might need a larger deposit. If you have a home loan as an owner-occupier and you decide to turn your property into an investment, you may then need to refinance. If you do this, the terms of your new mortgage could change and your lender could charge you a higher interest rate.

Given the differences between home loans for owner-occupied properties and investment properties, it’s therefore important to let your lender know the purpose for which your property is used, and if that purpose changes.

Can you rent out an owner-occupied home in Australia?

If your home is owner-occupied and you are paying off a mortgage, then it is very likely you will need to refinance to an investor home loan if you want to start renting out your whole home. This is because banks and lenders view owner-occupiers and investors differently. Renting a room in an owner occupied home, however, may allow you to stay on an owner-occupied home loan, as long as you remain living there.
It’s also worth keeping in mind though, that the Federal Government has its own rules about owner-occupied properties. According to the Australian Taxation Office (ATO), you can continue to treat the home you own and have lived in as your main residence for up to six years for Capital Gains Tax (CGT) purposes, even if you do not live there anymore and use it to produce a rental income.

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Do banks check owner-occupancy?

While banks and lenders may have their own procedures around checking on whether you are an owner-occupier, there are some common criteria that they all will look at when determining if it’s your primary residence. For example, a house is your primary residence if:

• you live at the property for the majority of the year,

• you have documentation such as tax returns or a driver’s licence that shows the property as your primary residence,

• and the property is within a convenient distance to your place of employment.

What is a main residence for tax purposes?

Whether your home is your principal residence in your lender’s eyes is a different question to whether it’s your main residence for tax purposes. According to the ATO, a dwelling you own (with or without a mortgage) is generally considered to be your main residence if:

• you and your family live in it,

• your personal belongings are in it,

• it’s the address your mail is delivered to,

• it’s your address on the electoral roll, and

• services such as gas and power are connected to it.

Whether a property is considered your main residence has potential tax implications – for example, the ATO says it can mean you don’t have to pay CGT on the home when you sell it.

As mentioned earlier, it’s possible for a home to continue being your main residence for CGT purposes even if you have moved out and become an investor from your lender’s perspective. That said, if you make money by renting out all or part of your property, this could potentially affect your eligibility for other tax incentives such as stamp duty concessions. It could also mean that you have to pay income tax on the rent you receive.

If you have any questions about tax liability or whether a home is still considered your main residence, it may be worth speaking to an accountant or other tax adviser.

Is there a penalty for renting out your owner-occupied home?

Lying to your lender when you’re renting out owner occupied property can have serious consequences. If you apply for a home loan as an owner-occupier but you actually intend to use the property as an investment, your lender might deny you a home loan if they become aware of this. This could lead to a black mark on your credit score, meaning other lenders might be more reluctant to approve you for a loan in future. It may also be considered fraud, which can result in jail time depending on the circumstances.

If you own a property as an owner-occupier, and you intend to move out so you can rent it, it’s also important to inform your lender of this. If your lender finds out that you have moved out and are making rental income from the property while still on an owner-occupier loan, then (depending on the situation and the terms of your loan contract) they could make the decision to recall the loan. This means that you might be given 30 days to pay off the balance owing, at which point the lender may sell the property to recoup the money they are owed.

How do you convert your home loan from owner-occupier to investment?

If you wish to convert your existing mortgage from an owner-occupied home loan to an investment one, you have several options. You may be able to:

• Refinance your home loan with your existing lender and perhaps try and negotiate a favourable interest rate on the basis that you are a loyal customer.

• Refinance your home loan to another lender who may offer a more attractive interest rate or home loan package than your current one.

• Consult with a mortgage broker who may be able to recommend a lender or home loan package that suits your particular needs and circumstances.

It may be a good idea to compare home loans and consider seeking financial advice to help you decide which of these options best suits your particular circumstances.

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