Can I turn my home loan into an investment loan?

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.

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.

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.

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.

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.