There are, in Australia, different types of home loans for a range of borrowers. When comparing mortgage products, one key distinction to consider is the difference between an owner-occupied vs an investment loan:
- An owner-occupied home loan is offered to borrowers who intend to live in the property they purchase.
- An investment loan is offered to those planning to buy and rent out the property to tenants.
This difference between the two is important as rates, fees and requirements differ.
What is an owner-occupied home loan?
An owner-occupied home loan is a mortgage designed for borrowers who intend to make the property their principal place of residence.
According to the Australian Taxation Office, your home is considered your principal place of residence if:
- you and your family live in it
- your personal belongings are in it
- it is the address your mail is delivered to
- it is your address on the electoral roll
- services such as gas and electricity are connected in your name.
In simple terms, if you intend to live in the property you are purchasing, you will need an owner-occupied home loan. This is important to disclose to your lender, as they usually consider this to be a ‘safer’ option than an investment loan. So, an owner-occupied home loan should come with a lower interest rate.
How are they used?
Owner-occupied properties are used as the owner’s main residence. They are more common in Australia than investment loans, especially among first home buyers.
What is an investment loan?
An investment loan is a mortgage designed for a buyer obtaining a property as an asset for the purpose of generating rental income.
Investment loans are usually issued to people who are already homeowners. As an alternative to a cash deposit, you may also use your existing property portfolio as equity or collateral for the investment loan.
How are they used?
Investment loans are used as a way to build wealth through real estate.
Using such a loan, an investor purchases a property which they rent out to tenants. This rental amount should ideally cover the mortgage repayments and generate a profit. This allows the owner to generate a ‘passive’ income and simultaneously build wealth through capital gain as the property’s value rises. In this way, the tenants pay off the loan while the property increases in value.
Of course there are risks involved. Extended tenant vacancies, property market falls, and interest rate rises can all place an investment property owner in a difficult financial situation. These risks reinforce the importance of understanding how property investing works before you dive in.
» MORE: What is ‘rentvesting’?
Investment loan vs owner-occupied loan
Share of the property market
Owner-occupied home loans comprise the majority of the Australian residential property market by some margin.
Data from the Australian Bureau of Statistics shows historically the proportion of dwellings that are owner-occupied has hovered around 67%[1]. New loan commitments in March 2024 revealed that owner-occupied lending was almost double that of investment lending[2].
» MORE: How to compare townhouses, apartments and houses
Types of loans available
Investment and owner-occupied home loans come with different structures and features.
Investment loan types:
- Interest only investment loans allow you to only pay off the interest portion of the loan only, while the principal remains the same for an initial period (usually 1-5 years.) This type of loan is unique to investors rather than owner-occupiers.
- Self Managed Super Fund (SMSF) home loans are also sometimes used by investors who want to borrow money through their self-managed superannuation fund to invest in property.
Common owner-occupied loan types
- Variable or fixed rate loans are two common forms. Fixed rate loans mean consistent repayments for the fixed period, while variable rate loans will mean repayments fluctuate with changes in the cash rate or where lenders increase rates out of cycle.
- Guarantor loans can be taken out by a first home buyer if somebody else, usually a family member, agrees to use their existing property as security on the mortgage.
- Low-doc loans are popular with sole-traders, self-employed or contract workers who do not have the same income documentation as salaried employees.
Investment and owner-occupier loans may offer features such as:
» MORE: Innovative home loan features worth knowing
Deposit size
Another key consideration when comparing investment and owner-occupied loans is the deposit required. In Australia, owner-occupied loans usually require a 20% cash deposit for the borrower to avoid paying lenders mortgage insurance (LMI)
For example, a $500,000 property would require a $100,000 deposit. However, you can secure an investment loan using existing assets (often other properties) as security against the loan.
For example, a homeowner who already owns a property valued at $1 million with substantial equity could use this equity as the deposit for an investment property.
» MORE: Best ways to save for a house deposit
Interest rates
Interest rates are typically lower for owner-occupied home loans.
Data from the Reserve Bank of Australia from May 2024 shows the average outstanding owner-occupied interest rate sits at 6.1% while the average investment loan interest rate is 6.36%[3].
This is due to the risks lenders associate with investment loans such as:
- fluctuation in rental market
- additional costs of being a property manager like fees, insurance, and damage.
LVR and LMI
Loan-to-value ratio is a percentage representation of the mortgage compared to the value of a property.
Traditionally an owner-occupied loan requires an LVR of 80% for the borrower to avoid LMI, which is paid to protect the lender should you default on the loan.
Lending rules
Lending criteria for owner-occupied loans is determined by serviceability — your ability to repay the loan. This is influenced by factors such as:
- income
- deposit
- savings
- existing debt
- credit score.
These factors also apply to investment loans. However, assets such as other properties with equity also help with approval as the lender has collateral should you fail to make repayments.
Tax
Owner-occupied properties do not generate any money for the owner, and are generally not eligible for tax deductions.
Investment loans, however, come with important tax implications. If you are earning an income off your investment property you need to record and declare the amount with the Australian Taxation Office.
According to the ATO, you need to:
- keep records orderly from the start
- work out what expenses you can claim as deductions
- work out if you need to pay tax instalments throughout the year
- declare all rental-related income in your tax return
- consider the capital gains tax implications if you sell.
Investment properties also come with tax deductions such as advertising, management fees, council rates and interest. More information on investment property tax can be found here.
Article Sources
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(Alicia Hall, Statistics and Mapping Section) Commonwealth of Australia, “Trends in home ownership in Australia: a quick guide,” accessed July 18, 2024.
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Australian Bureau of Statistics (May 2024), “Lending indicators,” accessed July 18, 2024.
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Reserve Bank of Australia, “Lenders' Interest Rates,” accessed July 18, 2024.
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