If you're buying a house to live in, you need an owner-occupier home loan. If you're a property investor then you need an investment loan, which will have a higher rate.
When you borrow money to buy a home you'll choose between an investment loan or an owner occupier loan.
An investment loan is needed when you're buying property to rent out. An owner occupier loan is for when you buy property to live in.
Investment loans tend to have higher interest rates, but there are tax benefits to making sure you have an investment loan for your investment property.
What are the differences between owner-occupier and investor loans?
At a basic level, a home loan is a home loan, regardless of whether you're buying a home or an investment property. You apply, get approved, borrow money and pay it back with interest.
Where investor loans and owner occupier loans differ is the tax benefits, how high the interest rate is and how hard it can be to get your application approved.
Here's a simple run-down of the key differences between investor and owner-occupier loans:
Interest rates. Owner-occupier loans typically have lower interest rates than investor loans. But more recently there has been less of a distinction, as you can see from the graph below.
Tax benefits. The interest you pay on an investment loan is tax-deductible, as are other costs like mortgage fees. This is because the tax office treats the investment as a business and those expenses are tax-deductible. Owner occupiers do not have this benefit with their home loans.
Ease of application. While it varies by lender and depends on your circumstances, it's often easier to get an owner-occupier loan than an investment loan. Lenders view owner-occupiers as lower-risk. This also depends on the current regulatory environment. A few years ago, regulators limited how many investment loans lenders could have on their books, making the application process tougher.
Investment loan rates vs owner occupier loan rates
The importance of a lower rate
You can't decide whether you're getting an investment loan or an owner occupier loan based on what has the lowest interest rate. That's down to what your intentions are with the property.
But it is important to understand how the rate differs so that you're clear on what your repayments could be. This is particularly the case if you're switching from an owner occupier loan to an investment loan, thinking that your rate would be the same.
Although getting a loan with a lower interest rate will always save you money, the priority is a little different with an investment property. When you invest, you're trying to generate income through rent and hopefully a higher capital growth. But it's still worth understanding how a higher rate affects your monthly repayment obligations.
Say you have a $700,000 owner-occupier home loan with a rate of 5.39% over 30 years:
Monthly repayment = $3,905
Total loan cost over 30 years (including interest) = $1,405,634
But if this was an otherwise identical investment loan with a higher rate of 5.59%, you'd pay more:
Monthly repayment = $4,015
Total loan cost over 30 years (including interest) = $1,445,091
With the higher rate, you'd pay $110 more a month and a total of $39,457 more in interest over 30 years.
When do you need an investment loan?
If you are buying an investment property, you need an investment loan. If you're planning to live in the property as your primary place of residence then you're an owner-occupier, even if you're renting out a room.
In the past, the Australian Prudential Regulation Authority (APRA) introduced various lending restrictions on investor loans. This made it harder to get an investor mortgage.
While lenders are more flexible today, the legacy of these restrictions remains. Some lenders not only charge higher rates for investors, but they also require bigger deposits or lower loan-to-value ratios (LVRs) on investment loans.
For example, a lender may offer owner-occupiers a home loan with an LVR of 90% (meaning a 10% deposit is required). But a similar loan for an investor could have an 80% LVR, meaning the borrower needs a larger 20% deposit.
And different lenders have different criteria. Lender A might take into consideration 100% of the rental income your rental property generates, but lender B might only count 80% of the rental income when assessing whether you can afford the loan.
A brief recent history of investor lending rules
Cam McLellan is a property investment specialist, the co-founder of OpenCorp and the bestselling author of "My four-year-old the property investor".
What we saw in 2013 – 2017 wasn't unusual, given the market cycle. Sydney's median house price rose 75%, and in 2014 – 2018 Melbourne's median house price rose 59%. What happened next was a test of APRA's power over the market. It showed it could pull its levers to ensure our property markets maintained safe, consistent growth.
By February 2017: APRA was alarmed that 60% of Sydney property purchases were interest-only investment loans. This meant 60% of properties in Australia's most expensive market, at the end of a major growth phase, were being bought by speculators trying to get rich quick. The banks had to slow this down. APRA realised that too many investors were trying to buy at the end of a market growth period (and were potentially about to lose money when a correction occurred). So, they put measures in place to protect investors from buying in an overheated market.
APRA brought the sledgehammer down. It introduced major restrictions on lending to investors, which caused a massive reduction in borrowers who qualified for lending, which led to a slowdown in demand for housing. Sydney and Melbourne median house prices reduced accordingly. This was an expected market correction after the high growth.
By October 2017: APRA had instructed banks to reduce their proportion of interest-only loans to 30% by 31 October. The banks had to move fast to accommodate this, so they introduced massive incentives for borrowers to move from interest-only to principal-and-interest loans.
By December 2018: With the 30% cap achieved, APRA knew its levers had worked. It removed the cap and the market started to loosen. Prices started to rise due to genuine pent-up demand, rather than speculation. APRA had done its job.
From 2019 onwards
These days, there’s a significant gap between owner-occupier home loan rates and investor rates, but APRA has loosened lending restrictions, making it easier for investors to get finance approved. The government and APRA are confident that they have the levers to use when required, they are confident that our financial industry is "unquestionably strong".
How do I find a suitable home loan for me?
Investors and owner-occupiers are looking for the same thing, ultimately: a loan with a competitive interest rate and features that suit their needs. This differs depending on your financial goals and your investment strategy (if you have one).
Here are some tips:
Look for a lower rate loan. Whether you're looking for an owner occupier loan or an investment loan, it's a good idea to shop around to find the best rate. Compare home loan rates widely before applying.
Fixed or variable. Regardless of the purpose of the loan, you can get a fixed rate or variable rate home loan. Fixed rates mean certainty because your repayments won't change for the fixed period. Variable rates allow you more flexibility with extra repayments and repaying early.
Work out what features you need. The best mortgage feature is an offset account, which lets you save money in the home loan and pay less interest. It can be worth paying a slightly higher interest rate or a monthly fee to get an offset account with your loan. Investors and owner-occupiers can take advantage of offset accounts.
Repayment type. You can either choose to make principal-and-interest repayments or interest-only repayments on your loan. If you make principal-and-interest repayments, you repay the money you've borrowed plus interest together. With an interest-only loan, you don't repay the loan at first. Instead you get smaller repayments (just the interest) for a while, and repay it all later. Investors often use interest-only loans to minimise their short-term costs while maximising their investor tax benefits.
Frequently asked questions
Investment property loans can be harder to qualify for than loans for your own home, as lenders typically have stricter criteria. This includes higher deposit requirements, tougher income and asset checks and higher interest rates. All of these additional costs and criteria are to reflect the increased risk.
Investment loans typically have higher interest rates than owner-occupier loans. This is due to the increased risk associated with investment properties, as lenders consider borrowers more likely to default on investment property loans compared to their own homes.
Yes, you can change your home loan to an investment loan if you decide to rent out your property. However, you must inform your lender, as investment loans typically come with higher interest rates and different terms compared to owner-occupier loans.
You may be able to borrow more for an investment property if the rental income from the property increases your borrowing capacity. However, lenders generally have stricter lending criteria for investment loans, including requiring a larger deposit.
Sarah is the author of How to Raise Rich Kids. With over 20 years of experience in property, finance and investment journalism, she is a trusted expert whose insights regularly appear across television, radio and print media, including Sunrise, Channel 7 News, Bloomberg and Yahoo! Finance. She has previously served as managing editor for Your Investment Property and Australian Broker. Her expert advice has been shared in the media over 4,000 times. Sarah holds a Bachelor’s degree in Communications and a Tier 1 Generic Knowledge certification, which complies with ASIC standards.
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