Many home owners decide to turn the home they've been living in into an investment property. This can mean turning your existing home loan into an investment loan.
You might want to change your home to an investment property for a couple of reasons:
Some owners keep living in their property but rent out a room or portion of the home.
In this situation, you don't have to convert your mortgage from an owner-occupier loan to an investment loan.
However, in both cases, you're generating income from the property. This changes your tax situation.
"Regardless of whether you're renting out one bedroom worth 30% of the home's overall footprint, or two bedrooms worth 60%, the loan is still classified as an 'owner occupier' if you're renting out a portion of the property while it remains your primary residence.
From a lender's view, this scenario doesn't impact the status of the loan. While a mortgage holder is using the property as their primary residence, the loan remains an owner occupier – not an investment loan.
However, if you're planning to earn a rental income and have to make structural changes to the property such as adding a spare bedroom, you may have to have a conversation with your bank."
Whether you're renting out all of your home or even just a bedroom, there can be tax implications. That's because the money you receive in rent is deemed assessable income.
You must declare the income on your tax return, but this also means you can claim deductions for the associated expenses.
The types of tax deductions that are available to a homeowner if they rent out part or all of their home may include:
If you are only renting part of your home, for example a single room, you can only claim expenses related to renting out that part of the house. This means you can't claim the total amount of the expenses you incur. You need to apportion the expenses on a floor-area basis. That is, calculate the size of the area used solely by the renter and add to that a reasonable amount based on their access to common areas.
Main residences are exempt from Capital Gains Tax, but if you're renting out all or part of your home you may need to pay CGT on part of any capital gain made when you sell your home.
"To work out the capital gain that is not exempt, you need to take into account a number of factors, including the proportion of the floor area that is set aside to produce income; the period you use it for this purpose; whether you're eligible for the 'absence' rule; and whether it was first used to produce income after 20 August 1996."
Switching to an investment loan from an owner occupier loan isn't as simple as asking your lender to move you over. It may involve refinancing your loan completely and that may mean switching lenders.
The first thing you should do to change your home loan to an investment loan is compare investment loan rates. Interest rates for investment loans are usually higher than those for owner occupier loans, so you should know the difference.
You'll also want to compare your options between principal and interest loans vs interest only loans.
Once you know what interest rates you're facing and the loan option you want, you can begin the application process. You might also want to call your current loan provider to see if they can match your rate expectations.
Interest rates for investment loans are typically higher than owner occupier loans, so that's one cost you need to consider.
If you need to refinance your loan that comes with additional costs like, loan discharge fees, new application and/or settlement fees, and potentially lender's mortgage insurance if you don't have enough equity.
If you're on a fixed rate home loan you'll also need to pay break costs to exit that loan early.
Due to the complexities and tax law involved, it's recommended that you seek advice from a qualified accountant before you rent out a room or your entire property, to ensure you're maximising your tax deductions, and you're not inadvertently wracking up a big tax debt in the form of CGT.
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