Whether you’re buying your first home or you’re looking to invest in property, chances are you aren’t quite wealthy enough to fork out the hundreds of thousands or even millions of dollars it can cost to buy one outright. Even if you do happen to have a seven figure bank balance, you probably won’t even want to bet it all on property. Before you go to the bank there are a few things you should know about home loan products. Below we delve into the super-duper interesting topic of owner-occupier and investment home loans.
You take out an owner-occupier loan if you’re genuinely looking to buy a home in which you’ll be living. This means you’re not looking to use the property as an investment so you’re not looking to earn rent. For now, owner-occupier loans also include any unrented holiday homes you’re shamefully using to hide all your birks now that you’re an avid reader of this blog and you’re looking to repent over your offensive fashion choices. However from January 2022 these rules are changing such that an owner-occupier loan can only include someone’s primary place of residence.
Dual occupancy properties (think duplexes or properties with one main residence and one granny flat) are trickier. It’ll ultimately come down to your lender’s policy but most will extend an owner-occupier loan to you if you plan to live in one and rent out the other. Don’t expect your lender to be too generous though. If you’re buying something with a fair few properties on the one lot (e.g. manor houses, small apartment blocks), this will much more likely be seen as an investment rather than an owner-occupied property even if you live in one of the properties.
Owner-occupier loans are better than investment loans. Why? They’re cheaper. Banks are not charities. They’re profit-making entities. Because they know you’re likely to earn rent on any investment properties you might own, they charge you higher interest rates on your investment loans so they can take a cut of that rent. Seek your own tax advice but as a general rule of thumb, interest payable on owner-occupier loans is not tax deductible (as a primary place of residence is not an investment).
If you’re buying a tenanted or soon-to-be-tenanted property or you’re otherwise looking to use the property to generate income, you should be in the market for an investment loan. If you’re buying a place to renovate or knock down and rebuild and subsequently sell for a profit, this also counts as an investment so you won’t qualify for an owner-occupier loan.
As we mentioned above investment loans are more expensive but (again seek your own tax advice) you are generally able to deduct interest payments from your taxable income. Buying an investment property involves yield calculations. We’ve talked about this before but as a quick refresher, here you’re looking to weigh all your investment costs (interest, maintenance costs, land taxes, council rates & charges, management fees etc) against your rental return. Interest is very likely your biggest expense (as 2-3% on a 700k loan is a lot of money) so be sure to pay very close attention to what interest rate you’re being charged and how this may impact your rental yield.
Stay tuned for all things principal and interest and a stronger birkenstock sass game.