Owner-occupier home loans

Are you looking to buy a home? Then you're an owner-occupier. This means the type of home loan you're looking for is an owner-occupier home loan and not an investment loan. That's a simple distinction. But there are many decisions you have to make when looking for an owner-occupied home loan. This includes the choice between a fixed and variable rate and deciding which loan features you need.

What is the definition of an owner-occupier?

An owner-occupier is someone who lives in a residential property as their principal place of residence. That is, you live in your own home. An owner-occupier is different from an investor, who purchases a property to use as an investment to create wealth, not as a place to live.

An owner-occupier home loan is a mortgage where the funds are used by the borrower to purchase a home to live in. This is distinct from an investment loan, which is used by an investor to fund the purchase of an investment property.

The definition of a principal place of residence

The Australian Tax Office considers a property to be your main residence if it meets certain criteria:

• You live in the home with your family and your belongings are there.
• You receive mail and are registered on the electoral roll at that address.
• You have utilities connected to the property.

For taxation purposes, the ATO also considers other factors, such as whether the home has been used to produce income that can be taxed. If your property is your principal place of residence, you can claim an exemption from capital gains tax (CGT) when selling your home.

How are owner-occupier home loans different from other loans?

Owner-occupier home loans are the most common type of home loan. The key difference between an owner-occupier home loan and other home loans (such as investment loans) is the loan's purpose. An owner-occupier home loan must be used for the purpose of purchasing a home to live in.

In terms of mortgage features and loan details, owner-occupier home loans, like other loans, have an interest rate and comparison rate, rate types, minimum and maximum loan amounts, various loan fees and maximum (and maximum insured) loan to value ratios.

But these specific details may look different on an owner-occupier loan when compared to an investment loan:

• The interest rate. Interest rates tend to be lower on owner-occupier home loans than investment loans (if looking at otherwise similar mortgages). This is because lenders regard investments as higher risk than homes.
• Rate types. Owner-occupier loans can be either fixed or variable. This is no different to investment loans. You can also choose to split your rate into fixed and variable portions.
• Loan to value ratio. Loan to value ratio (LVR) refers to the amount you can borrow in relation to the value of the property. The higher the LVR, the more you can borrow and the smaller your deposit needs to be. While both investor and owner-occupier loans can have maximum insured LVRs of up to 95% (meaning you only need a 5% deposit), it is more common on owner-occupier loans. A lender may require a bigger deposit for an investment loan.
• First home owner grants. If you're an owner-occupier and you've never owned property before, you may qualify for various government grants and stamp duty concessions or exemptions. This is something you can't get if you're buying an investment. Keep in mind that grants and concessions differ by state and territory, so you will need to check your local policies.
• Repayment type. Owner-occupier loans can have either principal and interest or interest only repayments, just like investment loans. Interest only loans are particularly popular with investors as a way of minimising non-tax-deductible investment costs. But owner-occupiers may use them too if they want to minimise their repayments in the short term.
• Features. Owner-occupier loans may come with features like a redraw facility or an offset account. These features are available on investment loans too.

Different types of borrowers need different loan structures

While owner-occupier loans look similar to investment loans and other products, the specific needs of the borrower may differ.

For example, an investor may care more about getting a loan with interest only repayments while an owner-occupier may care about getting a lower interest rate. A first home buyer with a small deposit saved may look for a loan with a high LVR and have their parents act as a guarantor to help them qualify for the home loan.

Of course, not every owner-occupier is a first home buyer. An owner-occupier can be selling their home and buying a new one. Or they may be refinancing to a new home loan in order to get a better deal or helpful mortgage features such as an offset account.

Finder survey: What do Australians think would be the average interest rate on an owner-occupier home loan with a 20% deposit?

Why do owner-occupiers get interest only home loans?

Interest only home loans make sense for some property investors because they can claim interest costs on tax (but not principal). Owner-occupiers can't do this and are generally better off with principal and interest repayments.

This is because repaying your loan principal means you are actually repaying your debt. Borrowers who opt for interest only repayments initially end up paying more interest in the end.

Why would owner-occupier borrowers choose interest only then? A major reason is to stay afloat when you're struggling with mortgage repayments. If you've just lost your job or your income is reduced for any reason, switching temporarily to interest only repayments can help you keep your mortgage going without missing repayments.

It's an option that can help you stay on top of your mortgage in the short term, but it will cost you more in the long run.

Can an owner-occupier claim tax deductions from their home loan costs?

Owner-occupiers are treated quite differently from investors for tax purposes.

When you sell your own home, you don't need to pay capital gains tax (CGT). This is a tax charged on investors who sell a property at a profit. Owner-occupiers can claim the main residence exemption mentioned above.

Investors can get a 50% discount on capital gains tax if they have owned the property for more than 12 months.

But investors do have the advantage of being able to claim tax deductions on expenses related to owning and maintaining an investment property. This includes the interest charged on a home loan.

Owner-occupiers can't claim these maintenance or interest costs back on tax. However, if you run a home office or work from home, there are some items and expenses owner occupiers can claim.

How do I change from an owner-occupied property to an investment property?

If you convert your home to an investment property, you will need to switch your owner-occupier home loan to a new investment loan. Depending on your lender's policies, you can either apply for a new investment loan or make a variation to your current loan and convert it to an investment loan. Your lender may have a variation form to complete or you may have to call and speak to a lending specialist.

You can also refinance to a new loan with a new lender if you think there's a better deal available. Just be sure to compare investment loan rates and look at exit and switching fees.

Speaking to a mortgage broker is also a good idea, as they can present you with multiple options and help you determine the optimal way to structure your current or new mortgages.

What does the ATO say about changing from an owner-occupied property to an investment?

When turning your home into an investment property, the ATO recommends you keep records of details related to the property and the income you generate from the property, such as the following:

• Your costs to purchase the property and the date you signed the contract. This is used to calculate your capital gains when you sell the property.
• Records of any rental income
• Records of all expenses incurred in maintaining or repairing the property, which you can claim as deductions.

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Written by

Richard Whitten

Editor

Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206), a Tier 1 Generic Knowledge certification and a Tier 2 General Advice Deposit Products (RG 146) certification. See full bio

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Richard has written 529 Finder guides across topics including:

• Home loans
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