How do loan reducer home loans work? | Finder

Loan reducer home loans

A loan reducer home loan lets you combine your home and investment mortgages to get a much lower rate on your home loan and a higher rate with tax advantages on the investment loan.

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In 2015, a new product known as a loan reducer was introduced to the Australian mortgage industry. The loan reducer lets borrowers bundle an owner-occupier loan and an investment loan together under the same lender, allowing them to access a heavily discounted interest rate on the owner-occupier loan. In return, you receive a higher interest rate on the investment loan, which means you can take advantage of the increased tax deductions available to investment borrowers.

How do loan reducer home loans work?

The aim of a loan reducer home loan is simple: to help you own your own home sooner through the benefits of investment. To do this, borrowers combine an owner-occupier loan on their principal place of residence with an investment loan.

Loan reducer home loans allow the lender to specify their margin for risk and required interest rate return across the two loans. They can then set the overall interest rate across the loan package and calculate the interest for each individual loan. This allows them to set a ceiling rate on the investment loan (the RBA’s cash rate + 2.5%) and a floor rate on the owner-occupied loan (the RBA’s cash rate + 0.5%).

Loan reducer example

  1. Owner-occupier loan rate: 1.80%
  2. Investment loan rate: 4.00%

In the example above, you get a very low rate on your home loan compared to any other products on the market. This makes your loan repayments smaller. Your investment loan, on the other hand, has a rate that's a bit higher than the most competitive investor rates available today. But that's not so bad, because interest on an investment loan is tax deductible. Interest on your owner-occupier mortgage is not.

Allocating the bulk of the interest rate to the investment loan allows you to enjoy increased capability for tax deductions on your interest payments on this part of the mortgage product.

Apart from the unique approach to interest rates, loan reducer home loans are standard in all other respects. This means you will need to discuss with your lender or mortgage broker issues such as any fees and charges that may apply, as well as the inclusion of additional loan features such as 100% mortgage offset accounts.

Which lenders offer loan reducer rates?

Only a handful of smaller, specialised lenders currently offer these products. Note that some of them have different names for the product, such as a pivot loan or rate reducer.

  • Switzer
  • Crown Money Management
  • Lockstar Finance

While Finder doesn't have partnerships with these lenders, you can contact them directly on their websites and learn more about their products.

How does the ATO treat loan reducer home loans?

Any new home loan product that promises huge interest rate savings is understandably met with scepticism by those in the finance industry. However, the loan reducer system has been reviewed by the Australian Taxation Office (ATO) and deemed legal.

The ATO released its product ruling (PR 2015/2) on loan reducer home loans on 25 March, 2015. Under the ruling, a lender can calculate a level of discount that can be applied to a borrower's home loan interest rate, and bring the lender's total return on all money loaned close to a target rate that produces an acceptable level of profit.

The discounted interest rate on a borrower's home loan will be applied for two years. After that time, the lender must review the borrower’s loan portfolio, which may result in a further interest rate adjustment. The interest rate on the home loan will also be automatically recalculated if any of the following occurs:

  • The lender varies its target rate
  • The lender’s standard variable rate for either home loans or investment loans is adjusted
  • Either your home loan or investment loan is substantially repaid or
  • A new loan or a refinanced loan is advanced

Neither the borrower’s home loan or investment loan can be part of a split or linked loan facility, involve any capitalisation of interest, or be cross-collateralised. Finally, under the terms of the ruling, loan reducer home loans can be used to refinance existing loans.

Pros and cons of loan reducer home loans

Pros

  • Interest rate discounts. Loan reducer home loans allow you to take advantage of an interest rate discount on your home loan, reducing the amount of interest you pay over the life of the loan.
  • Tax benefits. By shifting most of the overall interest rate to your investment loan, you can take advantage of tax deductible interest payments on this portion of the loan.
  • Package deal. Instead of taking out two separate loans, the loan reducer product allows you to combine an owner-occupied loan and an investment loan in the one package.

Cons

  • Fees apply. Make sure you’re aware of any fees and charges that apply to a loan reducer home loan before deciding whether it is right for you.
  • Investment borrowers only. These loans are only available to borrowers who need both an owner-occupied loan and an investment loan.

Is a loan reducer home loan right for me?

Whether or not a loan reducer home loan is right for you will depend on a range of factors, including the amount you wish to borrow and your overall financial situation. You will also need to consider any fees that apply when determining whether or not this type of loan is right for you.

An experienced mortgage broker will be able to explain the ins and outs of loan reducer home loans and help you to determine whether one could be beneficial to you.

More questions about loan reducer home loans

Is the interest rate on my home loan guaranteed to be the RBA cash rate + 0.50%?

No. The balances of your home and investment loans will also be taken into account when determining the interest rates that will apply.

What happens if interest rates rise?

Just like with any normal variable rate loan, the interest rates on both your home loan and investment loan would be reviewed and adjusted in line with any rate rises that may occur.

Can I use a loan reducer home loan to refinance an existing loan?

Yes, you can use a loan reducer home loan if you are looking to refinance your existing loan.

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