Why do investors pay more for a home loan?

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Investing in property has amazing benefits, from rental income and tax deductions to impressive capital gains. But even a casual browse of home loans reveals that investors tend to get saddled with higher interest rates than owner-occupiers – often by as much as 40 basis points. What gives?

Let’s explore why investors often pay more for mortgages in the long-run, and what they can do to manage the costs.

Investors vs. owner-occupiers: who pays a higher mortgage?

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If you’re considering investing in a property rather than living in it, it’s important to compare how much an investment home loan could cost you long-term. 

While interest rates will vary between loan types and specific products, investment home loans tend to run higher overall. Even a difference of 10-40 basis points – as seen in the table below – can significantly accumulate mortgage costs over time. 

Fig. 1: Variable interest rates comparison for home loans worth $400,000 (6 April 2022, sourced from Mozo’s database)

LoanAverageMedian
Owner Occupier, P&I3.03% p.a.
2.69% p.a.
Investor, P&I3.45% p.a.3.18% p.a.
Owner Occupier, IO3.60% p.a.3.43% p.a.
Investor, IO3.69% p.a.3.26% p.a.

Plugging these different variable interest rates into Mozo’s mortgage repayment calculator can give us a clearer idea of how investor loans can add up. For instance, assuming we want to borrow up to $400,000 over 25 years, different interest rates could cost the following:

Fig. 2: Average variable interest rates comparison for investors and owner occupied home loans worth $400,000

LoanAverage Interest RateMonthly RepaymentTotal Interest Payable
Owner Occupier, P&I
3.03% p.a.
$1,903
$170,928
Investor, P&I3.45% p.a.$1,992$197,535
Owner Occupier, IO3.60% p.a.$2,024$207,203

Investor, IO

3.69% p.a.$2,043$213,045

This gives us a mean difference of between $5,842 – $26,607 over time.

While rental income could in theory help cover these higher costs, that’s assuming everything goes perfectly and you have a paying tenant for the entirety of your loan. Not to mention all the other fees involved, or the potential of a property market downturn. 

So why do investors get slapped with a higher price tag?

Why are investment home loan interest rates so much higher than owner-occupier rates?

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When determining interest rates for home loan products, lenders consider a borrower’s risk profile and income serviceability. Anyone perceived to have a high risk or unstable income will usually have their borrowing capacity restricted and interest rates increased, to compensate for the liability.

Unfortunately, investors are seen as incredibly risky by lenders. And ironically, this is primarily due to property investment’s biggest perk: rental income. Rentvesting or ‘flipping’ a property can be a major source of moolah, but uncertain profits and locking your assets into one item can make lenders more than a little skittish. 

After all, what if your income suffers due to a market downturn, or your property remains vacant for too long? Price drops and a lack of rent can affect your ability to make repayments. And since you’re not living in the property, what’s stopping you from abandoning ship outright when repayments become too expensive? (Yep, being a property flight risk is absolutely a thing).

While these scenarios might seem far-fetched or plain ridiculous, they’re very real threats to lenders. So, they jack up interest rates accordingly. 

RELATED: What to do if the bank won't lend you as much as you want on your home loan

Investors also tend to have several investments running simultaneously, which means they borrow at higher levels of leverage and may have accrued other debts. Debt in general doesn’t look fantastic on a home loan application (even your HECS debt can haunt you), so it’s important to consolidate where you can.

Just to give you an idea of how risky investments look to lenders, between 2014-2018, the Australian Prudential Regulation Authority (APRA) specifically asked lenders to limit the amount of investor loans they gave out to reduce high-risk lending and improve practices.

How can property investors reduce costs long-term?

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There are a few things you can do to get a better deal on your investment home loan and decrease mortgage costs long-term.

  • Compare interest rates, since different lenders offer a wide range of interest rates (both fixed term and variable) for their home loan products. If you’re looking to maintain steady costs, fixed rate home loans could be the way to go, but you might miss out on savings if the lender cuts their variable interest rates later. Hot tip: fixed rates are rising at the moment, but a looming lift in the RBA cash rate might make variable loans pricier long-term.
  • Save for a bigger deposit, which decreases your application’s loan-to-value ratio (LVR) and therefore lessens the perceived risk in the eyes of the lender. 
  • Have a good credit score. Reducing debts and showing that you can afford timely repayments will make your application deeply attractive to lenders. Read our guide to improving your credit score to get started.
  • Liaise with a mortgage expert, since they can help you navigate the weeds and get a better deal.
  • Research, research, research. Tracking changes in interest rates and comparing the best products on the market will give you a critical edge when looking for a home loan.

Looking to invest in real estate? Browse our investment property guides for more tips and tricks, or compare a selection of investor home loans below.

Compare investment home loans - last updated 13 August 2022

Search promoted home loans below or do a full Mozo database search . Advertiser disclosure
  • Green Home Loan

    Investor, Principal & Interest

    interest rate
    comparison rate
    Initial monthly repayment
    3.89% p.a. variable
    4.31% p.a.

    Great low rate on investment loans when you package with your owner-occupied loan. Get a 7.0 star NatHERS rating or higher for up to 1.79% discount on your variable rate home loan. For homes less than 12 months old.

    Details
  • Unloan Variable

    Investment, Refinance Only

    interest rate
    comparison rate
    Initial monthly repayment
    3.44% p.a. variable
    3.36% p.a.

    For refinancers only. Built by CommBank, the Unloan is the first home loan with an increasing discount (conditions apply) for investors. No application or banking fees. No monthly account keeping or early exit fees. Apply in as little as 10 minutes.

    Details
  • PAYG Home Loan

    Owner Occupier, Principal & Interest, LVR<80%

    interest rate
    comparison rate
    Initial monthly repayment
    3.29% p.a. variable
    3.33% p.a.

    Low variable rate. Ideal for new home buyers or refinancers. Unlimited additional repayments. Unlimited free redraw. Application completely online. Optional 100% offset can be added for $120 p.a.. 20% deposit required.

    Details
  • Discounted Home Value Loan

    Investment, Principal & Interest, LVR <70%

    interest rate
    comparison rate
    Initial monthly repayment
    3.42% p.a. variable
    3.43% p.a.

    Competitive variable Investor rate. Unlimited extra repayments for free. Enjoy the flexibility to redraw additional payments at no charge. Receive $3,288 cashback when you refinance an existing home loan of $250,000. Must apply by 31 August 2022 and settle by 31 October 2022

    Details
  • PAYG Investor Loan

    Investment, Principal & Interest, LVR<80%

    interest rate
    comparison rate
    Initial monthly repayment
    3.64% p.a. variable
    3.68% p.a.

    Low variable rate. Ideal for investors buying or refinancing. Unlimited additional repayments. Unlimited free redraw. Application completely online. Optional 100% offset can be added for $120 p.a.. 20% deposit required.

    Details

* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate, loan amount and term entered. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

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