What are residential home loans?

There are two main reasons to purchase property; to live in the home as your primary place of residence or to rent it out as an investor. A residential home loan refers to the former of these mortgage purposes.

Residential home loans, or owner-occupier home loans, are offered to borrowers who intend to live in the property full time. Whatever your intended purpose for the property you wish to purchase, it’s worth understanding the benefits and disadvantages of an owner-occupier home loan.

The benefits of a residential home loan

• Competitive rates

In many instances, home buyers may find that lenders are willing to offer lower interest rates on owner-occupier home loans. This is because lenders perceive owner-occupiers as a less risky borrower. The theory is that if you’re living in a property, you’re more likely to work to repay the mortgage as it is paying for the roof over your head, compared to an investor renting out a property.

While this is not always the case, it’s worth keeping in mind that the risk you present to a lender will typically impact the home loan interest rate you may be offered. As interest is one of the most significant costs associated with a home loan, earning a lower interest rate could save you thousands over the life of the loan.

• Government schemes and grants

Most home buyer schemes and grants offered by the state and federal government are created for owner-occupiers - first home buyers in particular.

If you’re hoping to purchase an investment property and still gain access to schemes like the First Home Loan Deposit Scheme, First Home Owner Grant or stamp duty concessions and exemptions, you may need to consider your choices. In some instances, investors will choose to live in the property for 6-12 months (depending on the eligibility criteria) to qualify for these schemes before renting out said property.

• Greater borrowing power

For the same reason a lender may offer an owner-occupier a lower interest rate, they may allow a borrower to gain loan approval with a smaller deposit. There is more incentive for an owner-occupier to repay a mortgage over 25-30 years if they live in it, even if they only have a 5-10% deposit.

The disadvantages of a residential home loan

• Rental income

Arguably the biggest advantage of an investor home loan is that you are purchasing property as an asset that you can rent out to earn a passive income. While a good rental yield is never guaranteed (as with any investment), if you choose your property wisely you may find that you’re earning a passive income from rent as long as you own the property.

Ideally you can then use that rent money to repay your home loan – essentially allowing someone else to pay off your mortgage for you. And once your home loan is paid off, you can put that rental income back into other investments, helping to grow your portfolio.

• Tax deductions

Investors are also able to claim tax deductions on a number of aspects of the property that owner-occupiers cannot. This includes:

• Repairs and maintenance
• Travel related to the property (including inspections)
• Legal expenses (tenant eviction, defending damage claims)
• Interest charges

Investors may also be able to take advantage of negative gearing when your tax-deductive expenses for your investment property over a financial year are more expensive than the income you earn from it.

Investors can save money on their tax as, according to the Australian Taxation Office, you may be able to “claim a deduction for the full amount of rental expenses against your rental and other income – such as salary, wages, or business income. If your other income is not enough to absorb the loss, you can carry forward your loss to the next income year.”

Comparing owner-occupier home loans

If you’re considering purchasing property to live in, it’s crucial you compare key loan factors that will influence the cost and flexibility of the loan. This includes the interest rate, fees, features offered (if any) and whether the rate is fixed or variable.

To help you compare apples with apples, RateCity’s comparison tables allow you to filter down and view home loans side by side based on these key factors. This may help you to create a short list of options that best suit your financial situation and budget.

Compare home loans in Australia