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Can I turn my home loan into an investment loan?

Couple signing mortgage documents.

There are plenty of reasons you might want to turn your home into a rental property. But things are made a bit complicated when you’ve still got a mortgage attached to it. So are you required to inform your lender of your plans? And will changing the terms of your loan mean higher monthly repayments? We explore these questions below.

Why do investors pay more on home loans?

Not long ago, interest rates for owner occupiers and investors sat at around the same level. But measures to curb investor activity have seen rates for the two borrower types diverge over the years.

Acting on advice from regulators, who had grown concerned with banks’ overexposure to investor loans, banks pushed investor rates up (particularly on interest only loans) as a way to limit the build-up of risk in the system.

Nowadays, the difference between owner occupier and investor rates might not mean as much since rates for all borrower types have dropped significantly in recent years, especially in response to the pandemic. 

But the fact remains that investor loans tend to be the more expensive of the two. So if you’re thinking of switching from an owner occupier loan to an investment loan, expect your monthly repayments to be higher.

Do I need to tell my lender before leasing my property?

While it might be tempting to keep your lender in the dark about turning your home into a rental property, you might have an obligation to inform them. That’s because any changes to your living situation will affect the terms of your loan agreement. 

The loan documents you received after your home loan was approved should specify what you are and aren’t allowed to do. For example, CommBank’s terms and conditions explain “If we give you the loan so you can buy or build a home to live in, you must not lease the home without our prior consent.”

Obtaining your lender’s consent might not be a problem — after all, their main concern is whether or not you’ll be able to continue servicing the mortgage. Just keep in mind they might attach certain conditions you’ll need to comply with.

What are the tax implications?

Of course, if you convert your former residence into rental property, any rent received will go towards your assessable income. Thankfully, many of the expenses involved in maintaining a rental property can be claimed as deductions. These can include:

  • Interest on your loan
  • Advertising to find tenants
  • Real estate and property management fees
  • Council and water rates
  • Body corporate fees
  • Bank fees
  • Electricity and gas
  • Property insurance
  • Cleaning and maintenance costs.

If you intend to sell the property down the track, you might even be able to use the main residence exemption to reduce the capital gains tax (CGT) you pay. This allows you to continue treating a property as your main residence for up to six years after moving out. 

Since the dwelling was used to generate income, however, you’ll only receive a partial exemption. To get a clearer idea of what your tax obligations are, particularly if you intend to sell your property, it’s worth speaking to an accountant or financial adviser.

What if I only want to rent out part of the property?

If you intend to continue living in the property but want to rent out a spare room or two, you generally won’t be required to tell your lender. This is because no matter which way you look at it, the property remains your primary place of residence.

Once again, you’ll have to be mindful of the tax implications. That means keeping records of all income earned by renting out the room(s) and declaring it in your income tax return for the year. 

You should also keep records of any associated expenses that can be used to reduce your tax burden. In this case, however, you’ll only be able to claim deductions on those expenses relating to the part of your home you rent out.

For information on interest rates and lending trends, head over to our home loan statistics page. And if you’re in the market for a home loan, visit our home loan comparison page, or browse the selection below.

Investor loans

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Last updated 25 July 2024 Important disclosures and comparison rate warning*
  • Flex Home Loan

    Investor, Principal & Interest, LVR <60%

    interest rate
    comparison rate
    Initial monthly repayment
    6.29% p.a. variable
    6.53% p.a.

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  • Low Rate Home Loan

    Investment, Principal & Interest, LVR <80%

    interest rate
    comparison rate
    Initial monthly repayment
    6.19% p.a. variable
    6.25% p.a.

    Reap the benefits of a variable rate investor home loan with a bunch of features from Police Credit Union. Make extra repayments at any time without penalty. No monthly, annual or upfront fees. Free online redraw. 100% offset account available (T&Cs apply). Minimum 20% deposit. Qualifying criteria applies. Minimum loan amount is 200K. For new customers only. Mozo Experts Choice Home Lender Credit Union of the Year 2023.

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  • SMSF Home Loan

    LVR <70%

    interest rate
    comparison rate
    Initial monthly repayment
    6.99% p.a. variable
    7.00% p.a.

    Enjoy a competitive rate on your SMSF home loan with Loans.com.au. Available for refinancers only. No application fee and no settlement fee. No monthly, annual or ongoing fees. Unlimited extra repayments. Online access via Smart Money App. 30% deposit required.

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  • Flex Home Loan

    Fixed, Investor, Interest Only, LVR <60%

    interest rate
    comparison rate
    Initial monthly repayment
    6.49% p.a.
    fixed 2 years
    6.56% p.a.

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    Details
Niko Iliakis
Niko Iliakis
Money writer

Niko Iliakis is a finance journalist at Mozo specialising in home loans, property and interest rate movements. With an eye for facts and figures, Niko deep-dives into topics to help readers understand key info and make more informed financial decisions. He is ASIC RG146 (Tier 2) certified for general advice.

* 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. You can change the loan amount and term in the input boxes at the top of this table. 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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