What is an owner occupier home loan?

An owner-occupier, or OO, home loan is a type of mortgage specifically designed for individuals who intend to live in the property they are purchasing, as opposed to buying it as an investment.

Such a loan typically offers more favourable terms, such as lower interest rates and fees, compared to investment loans. This is because lenders consider owner-occupiers less risky compared to investors, as there is an assumption that an individual is more likely to prioritise payments for a home they live in. Investors are more exposed to market forces such as the rental market, market downturns, and the cost of maintenance.

There is also a regulatory requirement for banks to hold more liquidity (i.e. cash) to cover investment home loans as opposed to OO loans. This mitigates risk in Australian banking and is called the liquidity coverage ratio (LCR), but consequently means interest rates are likely higher. The LCR is administered by the Australian Prudential Regulation Authority, or APRA for short.

Owner occupier home loan interest rates and fees

At the time of writing the average variable interest rate difference between owner occupier and investor loans over the past five years has been 0.40% in favour of owner occupiers.

However the advertised interest rate doesn’t always tell the whole story; one lender, for example, might have a low rate but charges a lot of fees, which can add up in the long run. This is where the comparison rate is handy, as it is a useful indicator as to the total cost of the loan.

Typical fees payable on owner occupier mortgages

  • Application or Establishment Fee: This fee is charged for processing your home loan application. It covers the lender's costs of setting up the loan and can vary depending on the complexity of your application and the lender's policies.

  • Valuation Fee: Lenders often require a valuation of the property you intend to purchase to ensure it provides adequate security for the loan. This fee covers the cost of a professional appraiser to assess the property's value.

  • Lenders Mortgage Insurance (LMI): If you borrow more than 80% of the property's value (i.e. your deposit is less than 20%), you'll likely need to pay LMI. This can add up to thousands of dollars, but can be capitalised into the loan. This insurance protects the lender (not you) if you default on your loan.

  • Ongoing Account-keeping Fees: Some lenders charge monthly or annual fees to manage your home loan. These can add up over time, so it's essential to factor them into the total cost of the loan.

  • Offset or Redraw Fees: If your loan has a redraw facility or offset account that allows you to withdraw cash that lowers interest payable, there might be fees for each time you redraw funds or to keep the offset account going.

Financial and tax benefits of owner occupier homes and mortgages

In Australia, the principal place of residence (PPOR) has several tax considerations and benefits.

Here's a closer look, keeping in mind for any personalised or specific advice, it's best to consult a tax professional.

Capital Gains Tax (CGT) Exemption

Perhaps the most significant tax benefit for PPOR in Australia is the exemption from Capital Gains Tax. CGT is a tax on the profit made from the sale of property or an investment. However, if your property is your PPOR, you are generally exempt from this tax.

This can result in substantial savings, especially if the property has significantly appreciated in value over time. The general rules are that you can’t have used it to produce an income, and that it’s less than 2 hectares.

Absence Rule - 6 Year CGT Exemption

Another unique feature of Australian tax law is the 'absence rule.' This rule allows an individual to treat a dwelling as their PPOR even if they are not living in it, under certain conditions, for up to six continuous years.

This could be applicable if you temporarily move out of the house, rent it out, or leave it vacant. However, there are time limits and conditions that must be met to use this rule. And you’ll likely need to inform your lender this is now the case.

Land Tax & Rates

Land tax may be exacted by some states, and is usually a tax on property you own other than your PPOR. As such, your principal place of residence is generally exempt from land tax, or faces a lower rate, providing another financial benefit to owner-occupiers.

Similarly, council rates may be cheaper if you are an owner occupier rather than an investor.

First Home Owner Grants (FHOG) and Deposit Schemes

While not directly a tax benefit, it's worth mentioning the FHOG schemes available in many states in Australia. This one-off grant is designed to help first home buyers to buy or build their first home more affordably. The eligibility criteria and the amount of the grant vary from state to state, but generally, the property must be your PPOR to qualify.

The national Home Guarantee Scheme could also be a benefit, allowing you to enter the market with a 2-5% deposit and not pay lenders mortgage insurance (LMI).

Stamp Duty Concessions

Some states in Australia offer concessions on stamp duty (a tax on property transactions) for those buying a home to live in, particularly for first-time homebuyers. This can result in significant savings compared to purchasing a property as an investment.

Pension Assets Test Exemption

If you’re getting to your later years and looking to claim the age pension, your PPOR is generally exempt from the pension assets test, no matter its value. However if you are a homeowner, the threshold for other assets is lower than someone who doesn’t own their home.

Tax rules you can’t take advantage of with an owner occupied home

  • Negative Gearing: While negative gearing is more often associated with investment properties, it's important to understand its absence in the context of PPOR. Negative gearing allows property investors to deduct the costs of owning a property (including loan interest) from their overall income, reducing their taxable income. This benefit does not apply to a PPOR.

  • Home Loan Interest Deductions: Unlike in some countries, the interest on a home loan for your PPOR is not tax-deductible in Australia. This is an essential distinction from investment properties, where loan interest is an expense often deductible against personal income.

  • Depreciation Deductions: Similarly, you cannot claim depreciation on the PPOR for tax purposes, which is another point of distinction from investment properties. This includes things like fixtures and fittings such as appliances and carpet, and the dwelling itself.

How to apply for an owner occupier home loan

To apply for an owner-occupier home loan in Australia, specific identification and documentation are required, and there are several steps in the application process. Here's a breakdown:

Identification Needed

  1. Primary Photographic ID: A current passport or driver’s license is commonly accepted.

  2. Secondary ID: This can include a Medicare card, birth certificate, or a citizenship certificate.

  3. Additional Documents: Some lenders might require further identification, such as utility bills or bank statements, to verify your address and identity.

Steps in Applying for an Owner Occupier Home Loan

  1. Assess Your Financial Position: Understand your credit score, calculate your income, expenses, assets, and liabilities to determine how much you can borrow.

  2. Choose a Home Loan Product: Research various loan products to find one that suits your needs. Consider interest rates, fees, features, and flexibility.

  3. Gather Required Documentation: Apart from ID, you'll need proof of income (like pay slips or tax returns), proof of savings, details of current debts, and evidence of your down payment.

  4. Loan Application Submission: Complete and submit your loan application with all the required documentation. This can often be done online, in a branch, or with the help of a mortgage broker.

  5. Lender's Assessment: The lender will review your application, conduct a credit check, and appraise the property you intend to buy.

  6. Conditional Approval: If your application meets the initial criteria, you'll receive conditional approval, also called pre-approval. This is not the final approval but indicates you're on the right track.

  7. Valuation of Property: The lender will arrange for an independent valuation of the property you intend to buy to ensure it's worth the price you're paying.

  8. Unconditional (or Formal) Approval: Once all checks and valuations are satisfactory, the lender will provide unconditional approval, confirming that your loan has been formally approved.

  9. Loan Settlement: This is the final stage where the loan is settled, the funds are disbursed, and you can proceed to buy the property. This process usually involves legal representatives and is when you officially take ownership of the home.

  10. Moving In: Once settlement is complete, you can move into your new home!

Remember, the specifics can vary depending on the lender and your individual circumstances. It's always wise to seek advice or assistance from a financial advisor, and for tax, an accountant.