When you buy a home whether it is classified as owner-occupied or investment depends on your intentions behind buying the property. If you are planning to live in the home you bought, then it would be an owner-occupied home loan. If you are planning to sell the property for a profit or rent it out, then it would be an investment property. The process for obtaining an affordable mortgage basically depends on the ultimate goal you have in mind for the purchase.
Let us look at the various differences between the two so that when you’re applying for home loans to help you buy a house, you’ll know what to consider.
Rates are different
The distinction will most likely change the rate at which you’ll be charged interest. Investment loans are usually the more expensive of the two. In the past, there was very little difference between owner-occupier and investor home loan rates. Lenders tended to treat both classes of borrowers as equal risk. This is no longer the case.
Additionally, investment loans also have higher closing and ongoing fees. So overall, they tend to be the more expensive home loans.
Requirements are different
Because of APRA’s clampdown on investment lending, many lenders have changed their criteria for property investors. Some lenders have changed the maximum loan-to-value ratio, or LVR, available to investors. (LVR is the size of your home loan compared to the value of the property you’re buying.)
In addition to changing LVRs, some lenders now require a more stringent examination of investors’ income and expenses. As a borrower, a good savings history and accurate records of your financial affairs are a great place to start.
Repayments are different
One of the main features commonly available to investors that is now rarely offered to owner-occupiers is interest-only repayments. While interest-only repayments used to be commonly available to both investors and owner-occupiers, fewer lenders are willing to offer these repayment terms. This is because interest-only repayments can put borrowers in a risky situation. Lenders who offer interest-only repayments do so for a pre-determined period of time, usually up to five years. At the end of this term, your home loan repayments would revert to principal and interest.
Taxation laws are different
Investment property home loans are treated differently by the ATO than owner-occupier home loans. For tax purposes, the interest on an investment property home loan is seen as a business expense since investors are using their property as an income-producing asset. Therefore, all interest payments can be deducted from the property owner’s income at tax time. Interest for an owner-occupier home loan is not deductible.
This tax treatment is why some property investors choose an interest-only home loan. Paying only the interest maximises their tax deductible debt while minimising their outgoing expenditure.
It’s important to understand what your intentions are when you purchase a home, so you know which loan to apply for and the differences between the two. It is also important to be able to show you have enough funds set aside to pay off the mortgage.
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