If you own a rental property, there may come a time when you want to live in it. Reasons may vary for why you would want to do this, such as if you have recently returned from living overseas or are in dire financial circumstances.
Regardless of your reason, it would help if you considered switching investment loan to owner-occupied.
If you are someone giving this a serious thought, you have come to the right place. This article will look at what investors should consider before turning their investor loan to owner-occupied.
What to Know When Switching Investment Loan to Owner Occupied?
As their names signify, an owner-occupied residence is a property you intend to live in. On the other hand, if you purchase a property to rent out with the motive of claiming expenses for tax purposes, it is called an investment property.
Another difference is that any lender regards investor loans as having a higher risk than owner-occupied loans. This is primarily the result of the volatility of the rental market.
There is a high chance that investment properties can sit unoccupied, yielding no rental income for the owner. Investment properties also have high upkeep due to maintenance and property management fees.
Can I Live in My Investment Property?
The short answer is yes. An investor can become an owner occupier by moving into their investment property. However, before making a move, you must inform the Australian Taxation Office (ATO) as the ATO requires disclosure of the same.
Your primary residence, or principal place of residence (PPOR), as termed by the ATO, refers to where you permanently reside. Since this residence does not yield rental income, it is exempt from capital gains tax (CGT).
Turning your investment property into a primary residence can positively affect your CGT. However, if you move into your property, it will lose the ability to generate income through rent. This will mean you won’t be able to claim an exemption from CGT.
Why Should I Change My Investment Property Loan to Owner Occupied?
There are real benefits to an owner-occupier home loan. Data from the Australian Bureau of Statistics show that, of the total value of loan commitments, the majority of them are owner-occupied.
Here are a few reasons you should consider refinancing your investment loan to an owner-occupier home loan.
1. Enjoy Better Terms
Where investment loans are meant for rental income, owner-occupier home loans are designed for living on the property.
This means that you are eligible for home loan features if you switch to an owner-occupier home loan. These features can include access to insurance, cheaper credit cards, and other financial products. Most importantly, you can also avail the following:
- Redraw facility: A redraw facility allows you to access the extra payments you have made to your loan. You can make extra repayments and use the balance amount whenever necessary.
- Offset account: An offset account works like a redraw facility. It lets you access extra funds made on top of home loan repayments. It does this by letting you create a high-interest savings account that’s linked to your home loan.
- Fixed interest rates: Borrowers get fixed interest rates. This means that they can calculate repayments and budget more effectively.
2. Gain Principal and Interest Loans
Many investment mortgages are ‘interest only’, which means you are not repaying the loan principal. In its place, you only pay the interest overhead and depend on rental income.
Owner-occupier loans, though, are typically principal and interest mortgages. This means that you are paying the interest while reducing the property value. So at the end of the last repayment, you will actually own your home.
3. Be Exempt From Capital Gains Tax
An investment property will be subject to capital gains tax, whereas your primary residence will not be. However, relocating to an investment property will still mean you have to pay GCT for the time it was rented out.
4. Avail Lower Interest Rates
Investor loans usually mean a tenant who helps you with the mortgage is paying rent. Therefore, these loans are deemed higher risk because the property may go unoccupied or the rent may fall.
The higher the risk a lender assumes, the greater the interest rate. Meanwhile, these conditions don’t apply to an owner-occupier home loan. Due to this, they are comparatively cheaper than investment loans.
Tax Implications of Changing Investment Loan to Owner Occupied
The most significant consideration when refinancing an investment loan is its tax implications. Here are the two kinds of tax deductions these loans enjoy:
Capital Gains Tax
The biggest gain of switching a mortgage from investment to owner-occupier home loan is its effect on CGT.
This depends on the:
- Age of the property.
- Time period for which it was your PPOR.
- Length of time it was rented out for.
It doesn’t matter if a property is free from CGT. If it was the PPOR when it was owned, the ATO requires disclosure of this. In addition, it also requires profits declaration from an investment property’s sale.
Since this is a capital gain, it will be mentioned in an investor’s IT return and taxed at the nominal tax rate.
In a scenario where a house has been an investment property for one half of the ownership period and a PPOR for the other, CGT is allocated on a pro-rata basis.
Tax Deductions
Moving into your investment property will mean you cannot claim any deductible expenses against the property. However, if you keep renting out a portion of the property, you could claim some of these expenses.
If this applies to you, seek advice from your financial advisor to educate you on the tax deductions declaring practice. This will help you claim the correct proportion of expenses.
How to Change from Investment Loan to Owner Occupied
It would be best if you always discussed the specifics of moving into your investment property with your accountant. They will help you understand the eligibility criteria and plan out your repayment. If you don’t know a financial advisor, we have compiled all the steps here for your benefit.
1. Determine Your Eligibility
The first step in availing of a home loan, or any loan for that matter, is determining if you are eligible. In the case of an owner-occupied home loan, the owner-occupant should relocate to the home within 60 days of closing. The owner must also live there for at least a year to qualify for an owner-occupied home loan.
2. Inform Your Tenants
If you currently have a tenant living on your property, you cannot just yet begin packing your belongings for the move.
Residential rental laws provide tenants with a variety of rights. This includes an adequate notice period after which the owner intends to move to the property. To re-enter, you must issue a ‘Notice to Vacate’ to any tenants and offer them ample time in accordance with applicable state laws.
3. Weigh Up Available Options
Despite interest rates climbing, Australia’s credit lending scenario is currently competitive. This means that, with a little due diligence, you can find a good deal on an owner-occupier home loan.
4. Organise Your Paperwork
Refinancing to an owner-occupier home loan usually means ending your investor loan and taking out another. For this, you will need to get the necessary paperwork, such as your annual expenses, salary slips, and identification documents.
5. Consult a Mortgage Broker
While you will have to seek a new home loan, the process does not have to be lengthy or challenging. A mortgage broker can help you navigate the entire process by advising you on the best practices. This can include loans appropriate for your needs and then assist you in applying for the best one.
If you are looking for a mortgage broker with competitive rates, consider using Joust. You can choose from genuine offers on home loans as top Aussie lenders bid for your patronage in real time.
6. Apply for an Owner-Occupier Loan
Since your property will no longer produce income, your lender will reassess it. In this, they will determine your creditworthiness for the loan's entire period to determine how much money you can safely borrow.
7. Provide Adequate Notice to the ATO
To avoid paying CGT on your home, you must notify the ATO of your impending move. The ATO will then modify their records to reflect this.
Pros and Cons of Changing Investment Property into a Primary Residence
Pros
- Relocating to your own home will put a stop to paying rent elsewhere.
- When you sell your property, you will have less liability on capital gain tax.
- If you proceed to lease out a portion of your property, you can keep claiming some deductions.
Cons
- Once you move in, the property can no longer be rented out on an owner-occupier loan.
- You cannot claim tax deductions for repairs, home loan interests, etc., on your PPOR.
- CGT will still apply to a portion of any profits generated on the property sale.
Final Considerations
Living in their home is a watershed moment for every homeowner. Done correctly, mortgage refinance can help you realise your property goals.
With our Instant Match feature, you can match with our most trusted lenders. This allows you to obtain competitive prices based on your specifications.
Moreover, homeowners across the country have saved an average of $3,348 annually by using Joust!
