Most people know there are different types of home loans, with distinct terms and conditions such as variable interest rates.
However, the process for obtaining an affordable mortgage also depends on the ultimate goal you have in mind for the purchase. In particular, it matters whether you’re buying the property with the intention to make it your home or as an investment.
Here’s a look at each option and what it means for your home loan application process.
Investment loan vs home loan
As the names imply, the difference between owner-occupied residences and investment properties comes down to what you intend to do with them. When you’re buying a home or apartment you intend to live in, it’s called an owner-occupied property. If you plan to rent it to tenants, it’s considered an investment.
Some people may choose to live in a home for a while and then rent it out after moving somewhere else, such as when their finances permit a transition or their careers compel them to relocate. Others may purchase a building and lease it to tenants initially, planning to move in themselves at a later date. However, if you follow this path and want to refinance your mortgage as an owner-occupier home loan, you may need to live there a set period of time before you can make the transition.
What if you purchase a property with more than one flat or apartment? If it has four or fewer units, some lenders may consider owner-occupier as long as you live in one of them.
What it means for your home loans
Why does it matter? When you’re applying for home loans to help you buy a house or to refinance an investment property, you’ll need to specify whether you’re applying for an owner-occupier loan or an investor loan. The distinction will most likely change the rate at which you’ll be charged interest, whether you go with an offset mortgage, variable rates, fixed home loan or construction financing.
Investment loans are typically the more expensive of the two, both in terms of interest rates and additional closing costs, such as the appraisal fee. For example, a variable interest home loan for an owner-occupier might be available at 3.39 (1) per cent interest. For investment mortgages, the interest rate for a comparable loan might be 3.89 (1) per cent. If you’re looking for the cheapest investment home loan, look for lenders that don’t charge high fees. However lower fees may attract internet based lenders and it is important that you consider this.
Furthermore, you might need to put forward a larger deposit for an investment home loan, meaning your maximum loan-to-value ratio (LVR) will be higher. In Australia, many major banks and other lenders have recently lowered the maximum LVR and raised interest rates for investor home loans in response to concerns that the lending rate for this type of mortgage is growing too quickly.
How to get a loan to buy a house
When you apply for a home loan to purchase a house, you’ll need to provide information about the value of the asset, your income and liabilities such as existing debt. Finance Circle Group will evaluate these details and other considerations, including credit history, for the amount you intend to borrow and the type of loan you’re looking to obtain.
Before settling on a particular type of loan, we assist you to evaluate your options and compare rates with multiple lenders. Mortgage brokers such as Finance Circle Group can often offer better options as we have access to more than 25 lenders to choose from. Additionally, we assist you to assess the financial impact of different interest rates, terms and payment plans using a loan calculators so you can choose the option that best suits your needs and objectives. Speak with a trusted loan advisor if you need assistance evaluating your choices.
After we submit your application for a mortgage, we will communicate with the lender on your behalf thus proving one point of contact and remove the burden of bank jargon from you.
How to get a home loan for an investment property
For investor home loans, application process is similar with rental income taken in to account to assess borrowing capacity. We’ll need to demonstrate that you have a certain amount of money set aside to manage the mortgage.
The amount you’ll likely receive in rental income can also be a consideration for the application of the loan, since you might be able to cover the cost of your mortgage repayments and other expenses with this income. That means the investment might not actually lower your debt-to-income ratio (the percentage of your monthly income that’s put towards repaying your mortgage), which is one of the factors in the loan approval process.
Mortgage lenders also take into consideration the potential appreciation of your property over the course of the home loan. Both you and they may want to review information about vacancy rates for the area or property as well as trends in housing prices. These factors will come into play when you have your property valued.
(1) Rates quoted are as of 12 Jan 2020 and subject to change by the lenders without any notice
Finance Circle Group is not a property agent or financial advisers. This article is general and has not taken into account your objectives, financial situation, or needs. Consider whether any advice is right for you. You may need financial advice from a qualified adviser. Consider the product disclosure statement (PDS) before making any financial decision