Generally speaking, home loans for owner occupiers vary from investment property loans. Nonetheless, circumstances change; for example, you must move for work, or your family may grow. As a result, consider purchasing or renting a second property and making your primary residence an investment property.
If you’re an owner-occupier and still making mortgage repayments on your main residence, you must avoid accidentally renting it out. If you do, it may have serious consequences.
This article shares insights on renting owner-occupied homes in Australia and the potential penalties you may face.
What’s the Difference Between an Investment and Owner Occupied Home Loan?
Home loans are available for both owner-occupied properties and investment properties. However, they are usually structured differently because of the different purposes they’re used for.
While an owner-occupant loan is used to finance the main residence you live in, an investment loan is used to finance a property that will generate rental income.
The differences between the two types of home loans usually come down to the following:
Interest Rates
Typically, an investor home loan is costlier than those for owner-occupied homes. If you apply for an investor loan, you’ll likely find that the interest rate is a bit higher as banks and lenders consider investment property loans riskier.
Also, if you have a home loan as an owner-occupier and decide to turn your main home into an investment, you may have to refinance. Depending on the lending criteria and the terms of your new mortgage, your lender may charge you a higher interest rate.
Loan to Value Ratio (LVR)
Loan-to-value ratio (LVR) is the amount you’re borrowing as a percentage of the property’s value. If you apply for investment loans, you will likely find that the maximum LVR is slightly lower. This implies that you’ll need to contribute a larger deposit than you would for an owner-occupier loan.
Loan Repayments
With an owner-occupied home loan, you’re less likely to be allowed to make interest-only repayments.
Further, even if your lender does allow interest-only payments on your owner-occupied mortgage, it will most probably be short-term and under exceptional circumstances only, for example, during your maternity leave.
In contrast, with investment loans, depending on your lender, you may get up to 10 years of interest-only repayments during the length of the loan term. This will help you claim interest as a tax deduction.
Can You Rent Out Your Owner-Occupied Home in Australia?
Firstly, per the Australian Tax Office (ATO), if you move out of your main home and rent it out, you can continue to treat your former residence as your main home for up to six years for Capital Gains Tax (CGT). Nonetheless, you are not eligible to claim principal residence exemption for any other property you own for this period.
However, your existing loan type will be impacted if you’re still repaying off the mortgage on your primary residence and decide to rent it out. Additionally, with the change in status from owner-occupier to investment property, your mortgage, too, will need to change.
Since most lenders consider investment loans risky, you will likely have to refinance to an investor home loan with your current or other lenders.
First, you must let your present lender know that you’re making your home an investment property. This will likely result in a higher interest rate and different loan features.
If you do not want to rent out your entire property, you can also rent a portion or a spare room in your house while you continue living there. Depending on your loan terms, you can continue on an owner-occupier home loan in this situation.
What is the Penalty for Renting an Owner-Occupied Loan?
If your lender discovers that your home is no longer owner-occupied but rented out to produce income, there could be penalties for committing occupancy fraud. Being untruthful about the purpose of your existing mortgage may result in you even losing your home.
Here are some possible outcomes for home buyers who misuse an owner-occupied loan:
Your Loan Application Gets Rejected
If your lender finds out that your home loan application is for owner-occupier property, but you intend to use the property for investment purposes, they will likely deny you a home loan at the start.
This could have repercussions on your credit ratings. So in future, if you apply for a loan, other lenders may reject your application based on poor credit history.
Loan Gets Recalled, and You Could Lose Your Property
Suppose you’re considering converting your main home into an investment property by moving out so you can rent it out. It’s essential to inform your lender rather than have them find out that you’re earning rent from the property while still on an owner-occupier loan.
Your lender may recall the loan depending on the situation and your loan contract. In such cases, you’ll likely be given about a month to pay off the loan balance owing. If you cannot, your lender may sell the property to recover the balance amount owed to them.
Jail Time
If your lender can prove a case of owner occupancy fraud, it could result in jail time, depending on the circumstances.
How Do Lenders Assure Owner-Occupancy?
Some loans are exclusively available for owner-occupants only.
Most lenders implement their procedures to ensure owner-occupancy. However, some standard criteria help them determine if the place is an owner-occupied property.
Typically most lenders consider the following factors :
- Time: You should have moved into the home within 60 days of closing. Secondly, you should have lived at the property for most of the year. Finally, with some lenders, their terms may stipulate you should reside at that home for at least one year for the loan to qualify as an owner-occupier loan.
- Documentation: Your income tax returns, driver’s license and other essential documentation should indicate the property as your main residence.
- Location: For your home to be considered owner-occupied property, lenders will also see if it’s conveniently located from your workplace.
Can You Turn an Owner-Occupied Home into Investment Property?
Yes, you can turn your existing main home into an investment one using the options:
Refinancing
You could inform your current lender about your decision to move your loan from owner-occupier to investment home loan. You could then negotiate for a competitive interest rate based on your existing credentials as a loyal customer.
Alternatively, suppose you’re unhappy about the new terms. In that case, you could refinance your home loan to another lender willing to offer you a reasonable rate or a loan package with better features than your existing loan.
Our comprehensive insights on home loan refinancing and our online home loan refinance calculator can help determine if refinancing is right for you.
Seek Advice
If you’re unsure how to advance, it’s advisable to consult with a mortgage broker, who’ll likely have access to lenders suited to your particular needs and circumstances.
Nonetheless, you could simultaneously research and compare home loans and seek guidance and tax advice from financial experts. They will guide you regarding tax purposes and other considerations when deciding which option best matches your financial position.
What to Consider When Changing an Owner-Occupied Home Loan to an Investment Home Loan?
When switching your owner-occupied property to an investment property, it’s necessary to do your research.
If you’re unsure whether to convert your present home into an investment property, you should determine if you can afford the rise in your living expenses. For starters, once you buy a second property, you’ll have two mortgage repayments.
In addition, when changing to an investment loan to buy a property, there’ll be fees and charges associated with a property purchase, application or exit fees and other associated costs. These may be partially taken care of by your rental income but will still need planning and budgeting.
On the other hand, renting your home can help you grow your wealth and meet your financial objectives. For example, you’ll be able to generate rent, which can help pay your mortgage expenses. Furthermore, if you can maintain a positive cash flow, you can save sufficiently for retirement and secure your financial future.
Here are our top tips for when you’re thinking about changing your home loan from an owner-occupied to an investment loan:
Rental Appeal
It’s natural to have an emotional attachment to your primary residence. So, as many homeowners do, you may overlook the practical aspects of your property. However, to improve your chances of finding tenants, you must analyse your home’s desirability from a renter’s viewpoint.
Factors like the overall condition of your home, the need for significant repairs and nearness to public transport facilities and other amenities influence rental appeal. Likewise, your asking price for rent should be in sync with similar properties in the area.
Having an accurate idea about your owner-occupied home can help you set realistic expectations when converting it to a rental property. It will also help you ensure that it appeals to a wide range of potential renters and/or gives you an idea of the associated costs to make it appealing to prospective tenants.
Tax Implications
One of the main things investors have to consider is tax implications such as tax liability, tax benefits and deductions. While owner-occupiers don’t have many tax implications on a primary residence, there are several new taxation elements to consider for investment properties.
According to the ATO, you don’t have to pay CGT (Capital Gains Tax) on your main residence when you sell it. Also, for CGT purposes, your home can still be your main residence after you move out and become an investor from a lender’s viewpoint.
However, renting out all or a portion of your property may not be eligible for tax incentives such as stamp duty concessions.
Also, as an investment property owner, you’ll have to pay tax on your property earnings. The main taxes you’ll have to pay if you own an investment property include capital gain, stamp duty, land and income tax.
Suppose you leverage the main home’s equity to purchase a second property. In that case, the interest on your new home loan won’t be tax-deductible if you turn your main home into an investment property.
However, when you change your existing home loan into an investment loan, you’ll likely be claiming a tax deduction on a smaller debt than a new mortgage altogether.
The ATO allows you to claim a tax deduction on interest payments, council rates, repairs and maintenance, property management fees, depreciation, and other expenses. This can help offset to offset the cost of taxes.
In addition, if you incur a loss on your investment property, you could also look at negative gearing. This allows you to deduct losses on rental income losses from your taxable income.
Depreciation
Claiming property depreciation is one of the most significant advantages of investment properties.
Depreciation, in general, is a non-cash deduction. It enables you to claim a specific portion of the value of your investment property over its useful life.
A quantity surveyor will help you create a depreciation schedule to identify your eligible deductions. Many investors use these deductions to reduce taxable income and wealth-building.
How Joust Can Help You Change Loans
Switching from your owner-occupied loan to an investment property loan may come with a few challenges.
Our Instant Match tool is ideally suited to helping you find a lender and loan for your needs in just a few clicks.
We’ll match you to the three most suitable loans from our panel of reputed Aussie lenders. From there, you can compare their interest rates and features and choose the one that best meets your needs, with no obligation to proceed- it’s that easy!
The information in this article is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
