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Can you change your home loan to an investment loan?

Deciding to change your home loan to investment loan is a significant financial move. This often happens when homeowners decide to rent out their primary residence due to relocation, lifestyle changes, or a strategic decision to generate rental income. Let's explore how you can make this transition smoothly.

Understanding the Difference

The key difference between a home loan and investment loan lies in their purpose. A home loan is for properties you live in, while an investment loan is for properties you rent out or intend to sell for profit. Investment loans typically have higher interest rates and different lending criteria due to the higher risk associated with investment properties.

Steps to Change Your Home Loan to Investment Loan

  1. Talk to Your Lender
The first and most crucial step is to inform your lender about your plans. Transitioning to an investment home loan is a common process, but it requires clear communication. You might be able to keep your current home loan for a short period, but you'll face issues when claiming investment expenses like mortgage interest. Informing your lender is essential as it affects your loan structure and tax considerations. Lenders may reassess your financial situation, including your income, debts, and credit history, before approving the transition. For instance, you might need at least 20% equity built up to proceed.
  1. Factor in Refinancing Costs
If your current lender is accommodating, the transition might be smooth. However, some lenders may charge refinancing costs, which can be around $1,000. Refinancing also allows you to review your loan terms. Some loans offer interest-only payments for a period, which can help manage cash flow in the early stages of property investment. If you're on a fixed-rate home loan, you might incur break fees if you refinance before the fixed term ends. In such cases, it's generally advised to wait until the fixed term is over before making any changes. If you're not satisfied with your current lender's terms, you can refinance with a new lender, potentially securing a more competitive interest rate and flexible terms.
  1. Higher Interest Rates
Investment loans typically have higher interest rates. Your lender might adjust your rate, impacting your monthly repayments. This could set you back if you were ahead on your owner-occupier mortgage but now find yourself paying more towards interest. Lenders must allocate higher capital to cover investment home loans due to the increased risk, and they pass this cost onto you.
  1. Consider the Tax Implications
Making the switch to an investment property may result in tax benefits. Interest on investment loans is generally tax-deductible in Australia. Additionally, expenses related to maintaining and managing the property, such as repairs, agent fees, and insurance, can be claimed. If expenses outweigh the income, you can negatively gear your property, offsetting losses against your taxable income. However, you'll lose the Capital Gains Tax (CGT) exemption that applies to primary places of residence (PPOR). When you sell your investment property, CGT applies, depending on the ownership duration and profit made. Special rules apply if the property was your PPOR before becoming an investment. If you've owned the property for more than a year, you can claim a 50% CGT discount.
  1. Look at the Absence Rule
Australian tax law includes the 'absence rule,' which allows you to treat a dwelling as your PPOR even if you're not living in it, under certain conditions, for up to six consecutive years. This means you won't be charged CGT for that period. This rule is useful if you're unsure about fully committing to the investment world. You'll need to maintain some connection to your property, like having mail sent there. The absence rule applies if you temporarily move out, rent the property, or leave it vacant for temporary work, travel, or living with a relative. However, there are time limits and conditions to meet, and you'll likely need to inform your lender. Rental income will still be taxed as usual.
  1. Get Expert Help
Changing your home loan to investment loan is a significant financial decision that requires careful planning. It's advisable to seek professional financial and legal advice to navigate the complexities of this transition. Consult a financial adviser or accountant before embarking on your investment journey, and maintain communication with your lender.

Benefits of Changing to an Investment Loan

1. Tax Deductions One of the primary benefits of an investment loan is the ability to claim tax deductions on interest payments and other expenses related to the property. 2. Rental Income If you rent out the property, the rental income can help offset the loan repayments, making it a more manageable financial commitment. 3. Capital Growth Investment properties often appreciate in value over time, providing you with capital growth and potential profits when you decide to sell.

Conclusion

Changing your home loan to investment loan can be a strategic move to generate rental income and benefit from tax deductions. By understanding the process, considering the costs and implications, and seeking expert advice, you can make an informed decision that aligns with your financial goals. If you're considering this transition, reach out to Loans and Mortgage for expert guidance and support throughout the process. Our team is here to help you navigate the complexities of converting your home loan to investment loan, ensuring you achieve the best possible outcome.
Tags:best home loan brokers in Australiabest mortgage broker in AustraliaBest Mortgage Brokers in AustraliaFirst home loan brokershome loan advisorInvestment AdvisorInvestment Home Loans
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