When does your owner occupier loan become an investment loan?

Turning your home into an investment property means you have to tell your lender and switch to an investment loan. But if you're just renting out a room in your home, you don't have to do this.

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Many home owners decide to turn their home into an investment property. This can mean turning your existing home loan into an investment loan. Some owners keep living in their property but start renting out a room. In both cases, you're generating income from the property. This changes your tax situation. But you don't have to convert your mortgage from an owner-occupier loan to an investment loan if you're still living in it and just renting out a room.

Why does your loan type matter?

Andrew Mirams is the managing director of Intuitive Finance and is a qualified mortgage advisor who holds dual diplomas in Financial Planning (Financial Services) and Banking and Finance (Mortgage Broking).

Andrew Mirams is the managing director of Intuitive Finance and is a qualified mortgage advisor who holds dual diplomas in Financial Planning (Financial Services) and Banking and Finance (Mortgage Broking). Image: Supplied.

Ten years ago, this may not have been a big deal, as both owner occupier loans and investment loans attracted similar interest rates.

But mortgage broker Andrew Mirams, managing director at Intuitive Finance, says that in the last decade, regulators like APRA and ASIC have intervened. They imposed strict guidelines and restrictions on lenders in order to force them to limit their exposure to investment loans, which means lenders are now required to grade investment loans differently.

As a result, investment loans can be more expensive than owner occupier mortgages.

"In days gone past, a home loan and investment loan was basically the same rate, so it really didn't matter. Now, you pay a premium for an investment loan, meaning your repayments will be higher than you would pay on your own home loan. And who wants to pay more?" Mirams says.

"Most people don't update their lender and say, hey, I've changed my living situation, it's now an investment property and I'd like to give the bank an extra 5 grand or 10 grand a year. No one is doing that!"

No one may be lining up to give the bank more money. But are they legally required to do so?

What happens to your loan when you rent out a room?

Tony MacRae is general manager of MyState Limited's banking division. Previous to this, he had held senior roles with Westpac/RAMS, PMI and Virgin Money.

Tony MacRae is general manager of MyState Limited's banking division. Previous to this, he had held senior roles with Westpac/RAMS, PMI and Virgin Money. Image: Supplied.

The lender will usually require the mortgage holder to change the status of their loan in the event that the property stops being their primary residence.

However, let's say you own a two-bedroom apartment and you decide to rent out one room to a friend or colleague.

MyState Bank general manager, banking, Tony MacRae, says that in this instance, you don't need to inform your lender.

This is because by definition, your owner occupier property is still recognised as your primary residence, as you remain the owner occupier.

"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," MacRae explains.

"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."

MacRae says that a borrower who is renting out a spare room is therefore not required to let their bank know, as long as the property remains their principal place of residence.

"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," he says.

He adds that it's strongly recommended that you speak to your insurance company about any change to your living arrangements, as inviting paying renters into the space could impact your house and contents insurance policy.

What happens to your loan when you rent out the entire property?

Mirams points out that as a borrower, you have one primary obligation: to make your loan repayments.

"If you move out of your home and you rent it out, your primary obligation with the lender is still to make the repayments. But in the terms and conditions of your loan contract, it states that you're obliged to tell your lender if your circumstances change," he says.

It's unlikely that a lender would require or compel you to change the loan product, such as moving it from interest only to principal and interest (or vice versa).

However, MacRae confirms that the lender will usually require the mortgage holder to change the status of their loan "in the instance that the property stops being their primary residence".

"For instance, as a borrower, if you continue to rent out the property but move out and live elsewhere, you will have to inform the bank, which will potentially change the status of your loan, as well as interest rates and repayment amounts," he says.

What else do homeowners need to consider before renting out their home?

Picture not described

Peter Locandro is managing partner, Chan & Naylor Wheelers Hill, and is an accountant of 20+ years, a small business mentor and a property investor Image: Supplied.

There may be tax implications – both positive and negative – if you're planning to rent out a bedroom or two and earn extra income, so it is best to speak with your accountant about how this would affect you before you turn your home into an investment property.

Peter Locandro, managing partner at Chan & Naylor in Victoria, says that once your owner occupier loan becomes an investment loan, there are some points of interest from the ATO's perspective.

"If you rent out all or part of your home, the rent money you receive is generally regarded as assessable income. This means you must declare your rental income in your income tax return; you can claim deductions for the associated expenses, such as part or all of the interest on your home loan; and you may not be entitled to the full main residence exemption from capital gains tax (CGT), meaning you'll have to pay CGT on part of any capital gain made when you sell your home," he explains.

"Goods and services tax (GST) doesn't apply to residential rentals, so you're not liable for GST on the rent you charge. You also can't claim GST credits for associated costs."

The types of tax deductions that are available to a homeowner if they rent out part or all of their home may include:

  • Mortgage interest
  • Strata fees
  • Council and water rates
  • Building insurance
  • Repairs and maintenance (related to the space you are renting out)
  • Advertising for tenants
  • Pest control
  • Bank fees
  • Gardening
  • Land tax

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.

"As a general guide, you should apportion expenses on a floor-area basis based on the area solely occupied by the renter or user, and add that to a reasonable amount based on their access to common areas," Locandro says.

"You can only claim a deduction for expenses when the room was rented to a client. If you use the room in any capacity when it's not occupied, for example for storage or as an office, you can't claim deductions."

Renting a room to a friend or family member

Another point to consider is how much rent you charge. If you rent out all or part of your home at less than normal commercial rates – for example, you rent to a relative or friend at a reduced rate – this may limit the deductions you can claim, Locandro says.

"Note that payments from a family member for board or lodging are considered to be domestic arrangements and are not rental income, so you can't claim deductions for expenses in these circumstances," he advises.

Finally, there are some Capital Gains Tax (CGT) implications homeowners should be aware of.

"Generally, you don't pay CGT if you sell the home you live in under the main residence exemption," Locandro says.

"However, if you've used any part of your home to produce income – for example, by renting out all or part of it – you're generally not entitled to the full exemption. 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."

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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Name Product Interest Rate (p.a.) Comp. Rate (p.a.) Fees Monthly Payment

Suncorp Home Package Plus Fixed P&IHome 2Y Fixed≥ 20% Deposit

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1.89%
2.85%
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$3,000 refinance cash bonus
Lock in a low fixed rate for 2 years. Available with a 20% deposit. Eligible new borrowers can get the annual package fee reimbursed for the life of the loan. $3,000 refinance cash bonus for eligible borrowers. Other terms, conditions and eligibility criteria apply.

Well Home Loans Balanced Fixed Home Loan P&IHome 1Y Fixed≥ 10% Deposit

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UBank UHomeLoan Fixed P&IHome 3Y Fixed≥ 20% Deposit

UBank UHomeLoan Fixed
1.95%
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A competitive fixed rate loan with no ongoing fees. Requires a 20% deposit.

AMP Bank Professional Package Fixed Loan P&IHome 2Y Fixed≥ 20% Deposit

AMP Bank Professional Package Fixed Loan
1.88%
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HSBC Fixed Rate Home Loan Package P&IHome 2Y Fixed≥ 20% Deposit

HSBC Fixed Rate Home Loan Package
1.88%
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homeloans.com.au Low Rate Home Loan with Offset P&IHome≥ 40% Deposit

homeloans.com.au Low Rate Home Loan with Offset
2.14%
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Heritage Bank Fixed Rate Home Loan P&IHome 2Y Fixed≥ 5% Deposit

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2.19%
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homeloans.com.au Low Rate Home Loan with Offset P&IHome≥ 10% Deposit

homeloans.com.au Low Rate Home Loan with Offset
2.24%
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Westpac Flexi First Option Home Loan P&IHome≥ 5% Deposit

Westpac Flexi First Option Home Loan
2.29%
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Heritage Bank Advantage Package Fixed P&IHome 1Y Fixed≥ 5% Deposit

Heritage Bank Advantage Package Fixed
2.39%
3.15%
  • App: $0
  • Ongoing: $350 p.a.
$585.25
Get a partial offset account and flexible repayments with this package loan.

St.George Basic Home Loan P&IHome≥ 20% Deposit

St.George Basic Home Loan
2.49%
2.51%
  • App: $0
  • Ongoing: $0 p.a.
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$3,000 refinance cashback
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years
Name Product Interest Rate (p.a.) Comp. Rate (p.a.) Fees Monthly Payment

Nano Variable Home Loans P&IInvestment≥ 25% Deposit

Nano Variable Home Loans
2.29%
2.29%
  • App: $0
  • Ongoing: $0 p.a.
$577.55
Refinancers only. Investors can refinance this no-fee variable rate loan. You will need a 25% deposit. Fast online approval.

Athena Variable Home Loan P&IInvestment≥ 40% Deposit

Athena Variable Home  Loan
2.39%
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UBank UHomeLoan Fixed P&IInvestment 1Y Fixed≥ 20% Deposit

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2.14%
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St.George Fixed Rate Advantage Package P&IInvestment 2Y Fixed≥ 20% Deposit

St.George Fixed Rate Advantage Package
2.24%
3.89%
  • App: $0
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$3,000 refinance cashback.
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Westpac Fixed Option Home Loan Premier Advantage Package P&IInvestment 2Y Fixed≥ 5% Deposit

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Bank of Melbourne Advantage Package Fixed Home Loan P&IInvestment 2Y Fixed≥ 20% Deposit

Bank of Melbourne Advantage Package Fixed Home Loan
2.24%
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loans.com.au Smart Booster Discount Investor Variable Home Loan P&IInvestment≥ 20% Deposit

loans.com.au Smart Booster Discount Investor Variable Home Loan
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Well Home Loans Balanced Fixed Home Loan P&IInvestment 3Y Fixed≥ 10% Deposit

Well Home Loans Balanced Fixed Home Loan
2.34%
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homeloans.com.au Low Rate Home Loan with Offset IOInvestment≥ 40% Deposit

homeloans.com.au Low Rate Home Loan with Offset
2.59%
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$600.83
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HSBC Home Value Loan P&IInvestment≥ 30% Deposit

HSBC Home Value Loan
2.44%
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  • App: $0
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$589.12
$3,288 refinance cashback offer
This variable rate loan is available for property investors with 30% deposits. This loan has very few fees. Eligible refinancers borrowing $250,000 or more can get a $3,288 cashback. Terms and conditions apply.

UBank UHomeLoan Variable Rate P&IInvestment≥ 20% Deposit

UBank UHomeLoan Variable Rate
2.74%
2.74%
  • App: $0
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Suncorp Home Package Plus Fixed P&IInvestment 3Y Fixed≥ 20% Deposit

Suncorp Home Package Plus Fixed
2.28%
3.15%
  • App: $0
  • Ongoing: $0 p.a.
$576.78
$3,000 refinance cash bonus
Borrowers with 20% deposits can lock in a low fixed rate loan for three years. Eligible new borrowers can get the annual package fee reimbursed for the life of the loan. $3,000 refinance cash bonus for eligible borrowers. Other terms, conditions and eligibility criteria apply.

Nano Variable Home Loans IOInvestment≥ 25% Deposit

Nano Variable Home Loans
2.59%
2.40%
  • App: $0
  • Ongoing: $0 p.a.
$600.83
Refinancers only. This variable investment loan has interest-only repayments and is for refinancers only. Fast online approval. Requires a 25% deposit.

homeloans.com.au Low Rate Home Loan with Offset P&IInvestment≥ 20% Deposit

homeloans.com.au Low Rate Home Loan with Offset
2.39%
2.41%
  • App: $0
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$585.25
This investment loan keeps fees low, has a sharp interest rate and comes with a 100% offset account. This loan is not available for construction.

Athena Variable Home Loan P&IInvestment≥ 20% Deposit

Athena Variable Home  Loan
2.59%
2.48%
  • App: $0
  • Ongoing: $0 p.a.
$600.83
A competitive investor variable rate that falls as you build equity.

UBank UHomeLoan Fixed IOInvestment 3Y Fixed≥ 20% Deposit

UBank UHomeLoan Fixed
2.24%
2.64%
  • App: $0
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$573.72
Pay no ongoing fees on this investment loan fixed for 3 years.

Well Home Loans Balanced Variable P&IInvestment≥ 20% Deposit

Well Home Loans Balanced Variable
2.32%
2.35%
  • App: $250
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$579.86
If you're an investor with a 20% deposit saved you can get this low rate mortgage. Not available for construction.

UBank UHomeLoan Fixed P&IInvestment 5Y Fixed≥ 20% Deposit

UBank UHomeLoan Fixed
2.49%
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  • App: $0
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$593.01
Lock in a 5 year fixed rate on your investment loan and pay no ongoing fees.

Athena Variable Home Loan P&IInvestment≥ 30% Deposit

Athena Variable Home  Loan
2.49%
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Athena's refinance offer for investors and owner occupiers.

UBank UHomeLoan Variable Rate IOInvestment≥ 20% Deposit

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2.60%
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IMB Fixed Rate Home Loan P&IInvestment 3Y Fixed≥ 10% Deposit

IMB Fixed Rate Home Loan
2.35%
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Well Home Loans Balanced Variable P&IInvestment≥ 10% Deposit

Well Home Loans Balanced Variable
2.87%
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  • App: $250
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Competitive variable investor mortgage to fund your property portfolio. You can add a 100% offset account for just $10 a month.Not available for construction purposes.

UBank UHomeLoan Fixed IOInvestment 1Y Fixed≥ 20% Deposit

UBank UHomeLoan Fixed
2.29%
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$577.55
Investors can enjoy flexible repayments and an easy application process with this pioneering online lender.

Athena Variable Home Loan IOInvestment≥ 30% Deposit

Athena Variable Home  Loan
2.69%
2.52%
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  • Ongoing: $0 p.a.
$608.71
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homeloans.com.au Low Rate Home Loan with Offset IOInvestment≥ 20% Deposit

homeloans.com.au Low Rate Home Loan with Offset
2.69%
2.52%
  • App: $0
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$608.71
A competitive rate with no application or ongoing fee. This loan is not available for construction.
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