What is the difference between an Owner-Occupied Loan and an Investment Loan?

At a basic level, a home loan is a home loan regardless of whether you are buying a home or an investment property. The same process applies, you apply for a loan, you get approved, you borrow the money and pay it back with interest. However, at the application stage, you are required to choose whether the loan is to be for a property that is owner occupied, or an investment.

The key difference, as the name suggests, is the property’s purpose. Owner occupied loans are home loans for people who wish to purchase a home to live in, while investment loans are typically for people who wish to purchase a property to rent it out to tenants to make an income.

Where these loans differ is the interest rate, the tax benefits of an investment loan, and the ease of being approved by the lender. Let us go into this in a little more detail:

Interest Rates

It is perceived that investment loans carry a higher level of risk to the lender than an owner-occupied loan. This could be due to the reliability of your tenants to pay the rent on time and for the uncertainty around vacancy and non-rental periods. For this reason, Investment loans generally have higher interest rates than Owner Occupied loans.

Tax Benefits

The interest that you pay on an investment loan is tax deductible as are other costs such as mortgage fees and other bank fees. This is because the ATO treats the investment as a business and as such, the business expenses are tax deductible. We recommend that you discuss these tax benefits further with your accountant.

Application Approval

Although it may vary from lender to lender and would also be subject to your personal circumstances, generally, there would be further requirements in place for the approval of an investment loan. For example, some lenders may require a 20% deposit or lower Loan to Value ratio than would be required for an Owner-Occupied loan. Additionally, some lenders may consider 100% of the rental income generated from your investment property however other lenders ma only consider 80% of the rental income.

How to Find the Most Suitable Investment Loan?

The answer to this question it to ensure that you have done your market research! There are so many different lenders in the financial market today, all with different products to service all sorts of customers. Not any one person’s financial circumstances and strategies are the same. You need to consider your own circumstance and find the right loan product and lender for you.

Some helpful tips to assist you are:

  • Look for a lower interest rate – ensure that you are comparing loan products and fees and charges.
  • Fixed or Variable Rate – Fixed rates will allow for certainty of your repayments for the period that your loan is fixed which mat assist with budgeting. Alternatively, variable rates can allow for additional repayments to be made and would generally offer slightly lower rates.
  • Features – all additional features can come at a cost, so it is important to consider what features you need. The best feature is an offset account which allows you to save on interest.
  • Repayment Type – you can choose to pay your home loan off with Principal and Interest payments, or you may choose to pay Interest Only for a period. Investors often use Interest only loans to minimize the short-term costs while maximizing their investor tax benefits.

The best advice how, is to contact your Finance broker and they will do all the hard work for you!