In your home purchase journey, the type of loan you apply for will depend on the property’s intended use. You might encounter the terms owner-occupied or investment at some point.
The primary difference between an owner-occupied property and an investment property is primarily based on whether or not you reside in it. As the name suggests, if you live in the property, it’s categorized as owner-occupied. However, if you intend to generate income through rental or capital gains while living in another property, it’s classified as an investment property.
Owner Occupied vs Investment
Understanding the differences between owner-occupied and investment home loans can be crucial in determining which loan is right for you. Here are five key things to keep in mind:
Interest rates vary depending on the loan type
Whether you’re considering an offset mortgage, variable rate, fixed home loan, or construction financing, classifying your property as either owner-occupied or investment can impact the interest rate you’ll be charged.
Investment properties are often considered riskier
Lenders typically see investment properties as a riskier investment because the rental market can be unpredictable. Extended vacancies can make it challenging to generate sufficient income to meet mortgage payments, and landlords may incur additional costs such as property management fees and landlord insurance.
Owner-occupied home loans are for primary residences
An owner-occupied home loan is for those purchasing a home to live in. When applying for this type of loan, lenders will assess your financial situation, including your income, assets, and existing debts, to determine your borrowing capacity.
Investment loans are for rental properties
Investment loans are for those planning to rent the property to generate income. Borrowers may be required to provide a larger deposit when applying for an investment home loan, resulting in a higher maximum loan-to-value ratio.
Eligibility criteria may differ between loans
While both loans serve the purpose of buying property, the eligibility criteria may vary. It’s essential to understand these differences to make an informed decision about which loan is right for you.
Can I Convert My Residential Home Into an Investment Property?
Yes, you can convert your residential property into an investment property. However, you must inform your bank or lender before renting it out. They will guide you through switching to an investment loan, which often comes with different features and interest rates.
If you’re still paying off a mortgage on your owner-occupied home and plan to rent out the entire property, you’ll likely need to refinance to an investment loan. Failing to notify your lender could result in serious consequences, including occupancy fraud.
The Australian Government enforces strict rules on owner-occupied properties. According to the Australian Taxation Office (ATO), if you move out and rent the home, you may still treat it as your primary residence for up to six years when calculating capital gains tax (CGT).
