Investment loans versus owner-occupier home loans

Rows of tiny housesYour goals and property strategy will determine the type of home loan you need.

When you’re comparing home loans, it’s easy to notice some distinctions between the products on offer, such as fixed rate versus variable rate or home loans packed with features versus no-frills products. But one of the most important distinctions is how you plan to use your home loan.

Home loans will vary substantially depending on whether you’re buying a property to live in or purchasing one as an investment.

Different rates

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.

In 2014, the Australian Prudential Regulation Authority (APRA), the body that regulates Australia’s banks, announced it would set a 10% cap on new investor lending. This meant banks had to reduce the proportion of new home loan business going to investors to 10% of their total home loans.

As a result of this change, lenders have tried to stem the tide of investment property borrowing, largely by lifting rates on property investment home loans. These days, there’s a significant gap between owner-occupier home loan rates and investor rates.

How significant? Currently, the lowest owner-occupier home loan rate on offer through the finder.com.au database is 3.54%. By contrast, the lowest investor rate on offer is 3.89%. This 35 basis point difference can make a big difference to the total cost of a loan.

Example

Say you have a $500,000 home loan for 30 years at 3.54%:

  • Monthly repayment = $2,256.40
  • Total loan cost over 30 years = $812,304.90

But if the rate on that loan increased to 3.89% things would look very different:

  • Monthly repayment = $2,355.48
  • Total loan cost over 30 years = $847,971.87
  • You'll end up paying $35,837.97 more

This being said, there are still attractive rates on offer for property investors, and some of the other features of investment home loans can help reduce the impact of higher rates.

Different criteria

Because of APRA’s clampdown on investment lending, many lenders have changed their criteria for property investors. This means the loans can be slightly more difficult to get than in the past.

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. For instance, if you buy a property worth $500,000 with a home loan of $450,000, your LVR would be 90%.

Many lenders have reduced the maximum LVR they offer to investors to as low as 80%. This means you would need a 20% deposit to purchase a property. However, there are still lenders that offer property investment home loans with LVRs up to 95%.

In addition to changing LVRs, some lenders now require a more stringent examination of investors’ income and expenses. Some have wound back incentives available to property investors. And a few lenders have ceased lending to property investors altogether.

Different features

One of the main features commonly available to investors that is now rarely offered to owner-occupiers is interest-only repayments.

Repayments on a home loan are typically either principal and interest or interest-only. A principal and interest repayment means that a portion of every repayment is devoted to the interest while another portion is devoted toward the principal, or the original amount borrowed.

An interest-only repayment means that only the interest charges on the home loan are being repaid, so the amount you owe isn’t reduced. What is reduced, however, is the size of your monthly repayment.

For instance, if you had the 3.89% $500,000 investor home loan given in the example above, your principal and interest repayment of $2,355.48 would fall to $1,620.83 if you chose an interest-only repayment. This is a massive $734.65 difference in your monthly repayments.

Compare interest-only home loans

While interest-only repayments used to be commonly available to both investors and owner-occupiers, fewer lenders are willing to offer these repayment terms. Investors can access interest-only repayments if they’re able to provide justification for the reason they’re choosing these repayments instead of principal and interest repayments. However, it’s rare these days for owner-occupiers to be able to justify interest-only repayments.

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. This would mean a significant rise in your monthly repayments. Meanwhile, you would not have actually reduced the amount you owe.

So why would investors choose interest-only repayments? The answer is because of the different way investment home loans are treated for tax purposes.

Different tax treatment

Because investors are using their property as an income-producing asset, it means any income they see from their investment is taxed by the Australian Taxation Office (ATO). It also means they can deduct any expenses incurred while generating that income.

Because of this, 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. Therefore, all interest payments can be deducted from the property owner’s income at tax time.

Interest for an owner-occupier home loan, on the other hand, 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 outgoings.

Maximising your tax return as an investor

Summing it up

The way you use your property will ultimately dictate the type of home loan you need. If you’re a property investor, you may pay a bit more and need to save a bigger deposit in order to qualify for a home loan. However, with good rates still on offer and the favourable tax treatment given to property investors, putting your money in bricks and mortar can pay big dividends.

Rates last updated November 16th, 2018
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Loan purpose
Offset account
Loan type
Repayment type
Your filter criteria do not match any product
Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
3.89%
4.24%
$0
$0 p.a.
80%
Fix your rate and minimise repayments for 2 years with this interest-only investor mortgage.
3.99%
3.99%
$0
$0 p.a.
80%
Get a discounted, low-fee investor loan from a convenient online lender. 20% deposit required.
3.99%
4.13%
$0
$10 monthly ($120 p.a.)
80%
A competitive variable rate home loan with no application fee.
3.84%
3.91%
$0
$0 p.a.
80%
Get instant online approval and flexible repayment options with this fixed rate mortgage for investing.
3.79%
3.82%
$0
$0 p.a.
80%
An essentials variable investor mortgage with a high borrowing amount so you can fund a large purchase.
4.08%
4.13%
$600
$0 p.a.
90%
Fund your investment purchase and offset up to $15,000. Available with a 10% deposit.
3.99%
3.99%
$0
$0 p.a.
70%
Investors with a 30% deposit can get this low rate loan to fund their property portfolio. Take advantage of split and redraw facilities.
3.74%
3.79%
$499
$0 p.a.
80%
Competitive variable investor mortgage to fund your property portfolio. You can add a 100% offset account for just $10 a month.
3.93%
3.94%
$0
$0 p.a.
80%
This investment loan keeps fees low, has a sharp interest rate and comes with a 100% offset account.
3.99%
5.35%
$600
$0 p.a.
90%
Competitive rates for fixed for 3 years with redraw facility.
4.03%
3.92%
$499
$0 p.a.
80%
A competitive 3 year investor rate with principal and interest repayments. Optional offset account with a $10 monthly fee.
4.05%
4.22%
$0
$10 monthly ($120 p.a.)
90%
Lock in your interest rate on your investment property for 2 years. For a limited time you can earn double Velocity Frequent Flyer Points.
3.91%
3.92%
$0
$0 p.a.
80%
Investors can go from application to approval in as little as 20 minutes with this innovative online lender.
4.43%
4.28%
$600
$0 p.a.
90%
An interest only investor mortgage that lets you offset up to $15,000. Available with a 10% deposit.
3.98%
3.98%
$0
$0 p.a.
70%
Investors can get a 100% offset account and a low rate if they have a big deposit. 100% online application process.
4.09%
4.87%
$0
$395 p.a.
90%
Buy your investment property and set your repayments for the first year. Available in QLD, NSW and ACT only.
4.24%
4.00%
$0
$0 p.a.
80%
Buy an investment property and enjoy the certainty of a 3-year fixed rate with interest-only payments.
4.09%
4.40%
$0
$0 p.a.
70%
Forget about rate rises for two years and minimise your investment repayments with this interest only mortgage. Requires a 30% deposit.
4.54%
4.59%
$600
$0 p.a.
80%
An investment loan for new Heritage Bank customers. Low fees and interest-only repayments.
3.97%
3.99%
$0
$0 p.a.
80%
Package your owner occupied loan with investment loan and receive a discounted investment rate. 100% offset account included.
4.29%
5.33%
$0
$395 p.a.
90%
Lock in a competitive investment rate and combine your loan with a credit card and transaction account for extra savings. Package fee applies.
3.99%
4.62%
$395
$0 p.a.
80%
Investors can enjoy flexible repayments and an easy application process with this pioneering online lender.
4.29%
4.31%
$0
$0 p.a.
80%
Investors will pay no application or ongoing fees for this interest-only loan.
4.18%
4.18%
$0
$0 p.a.
80%
Investors get a 100% offset account and pay no application or ongoing fees on this loan from an innovative online lender.
4.14%
3.96%
$0
$0 p.a.
80%
Investors can go from application to full approval in as little as 20 minutes with this innovative online lender.
4.13%
4.14%
$0
$0 p.a.
90%
Access a fee-free offset account and a special interest rate for investors.
4.29%
4.31%
$0
$0 p.a.
80%
A simple, variable rate investor loan from an online lender that keeps fees to a minimum.
3.99%
4.62%
$395
$0 p.a.
80%
Investors can enjoy flexible repayments and an easy application process with this pioneering online lender.
4.90%
4.31%
$0
$0 p.a.
80%
Lock in a fixed rate for 5 years and make interest-only payments with this investment loan.
4.24%
4.68%
$0
$0 p.a.
90%
Fix your investment repayments for 1 year. You can get this loan with a 10% deposit. Available in QLD, NSW and ACT only.
4.18%
4.19%
$0
$0 p.a.
80%
Investors can easily access their equity using BPAY, a debit Master Card or cheque book with this interest-only line of credit.
4.31%
3.95%
$0
$0 p.a.
80%
A variable interest-only loan for investors. Fast application, low fees, optional offset account. 100% online lender.
4.64%
5.39%
$0
$395 p.a.
90%
Pay off your investment knowing your exact repayments for the first 4 years. Get this loan with a 10% deposit.
4.29%
4.27%
$0
$198 p.a.
70%
Fund your property portfolio with this fixed rate mortgage which includes a 100% offset account. 30% deposit required.
3.94%
3.92%
$0
$0 p.a.
80%
Lock in your interest rate for 2 years and enjoy flexibility, an optional offset account and a fast online application process.

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