Forums / Getting Technical / Finance / Home Loan v Investment Loan

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  • Profile photo of propertyboypropertyboy
    Participant
    @propertyboy
    Join Date: 2008
    Post Count: 206

    Hi all,

    When I purchased my principal place of residence the lender had set it up as an investment loan. I have been told lending managers were doing this unbeknown to customers so that the loans could get approval as the rental income could be used to support additional debt levels.

    Until recently this was not an issue as a higher rate was not applicable to investment loans. However, as my bank has now added a rate premium for Investment loans my rate can be reduced as I can convert it to a home loan. I have called up NAB and they have agreed to reduce my rate by 1.1% as it is a loan against my Principal place of residence.

    Before I jump at this, are there any implications I should consider?

    If I have to relocate for work and I want to rent my flat am I still permitted to do so under this product or do Home Loan products prohibit you from doing so?

    I know that in the UK you have to convert the loan to a Buy to Let loan which results in a lower LVR and higher rate.

    Do banks undertake any checks or measures to ensure customers with home loans are actually living in the property or are not renting the houses out? Is this something that is prohibited? The NAB customer service assistant outlined if I was to temporarily locate overseas for work I could rent my house and still be on a home loan product. THe only real implication is for negative gearing as interest wil no longer be deductible if you are on a home loan

    What about insurance? Could the insurance company reject payout on the grounds that my house is illegally rented out

    • This topic was modified 1 year, 11 months ago by Profile photo of propertyboy propertyboy.
    • This topic was modified 1 year, 11 months ago by Profile photo of propertyboy propertyboy.
    • This topic was modified 1 year, 11 months ago by Profile photo of propertyboy propertyboy.
    • This topic was modified 1 year, 11 months ago by Profile photo of propertyboy propertyboy.
    • This topic was modified 1 year, 11 months ago by Profile photo of propertyboy propertyboy.
    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,173

    Convert it asap and ask for it to be back dated from when you moved in.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of JaxonJaxon
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    @jaxona
    Join Date: 2014
    Post Count: 282

    YES 100% if you break the rules of the contract you would very likely not be covered by the insurer.

    In regards to renting it out as your PPOR, I suggest doing the right and ethical thing and telling them, loose ends bite your harder than they are worth.

    Profile photo of Corey BattCorey Batt
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    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    If you’re living in the property switch your loan to the owner occupied coding – this will reduce your rate significantly.

    As per if you move out in the future – the lender will generally not require you to notify them/reassess your debt/make any new application – heck if you call up they will probably not have a clue what to do and just hang up.

    When you move out, just make sure you have the appropriate insurance setup for it being an investment property and no longer an principal place of residence.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of propertyboypropertyboy
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    @propertyboy
    Join Date: 2008
    Post Count: 206

    I can’t seem to find any wording in the common NAB home loan terms and conditions that outline a home loan products prohibits the temporary leasing of the property or any requirement that it has to be converted to an investment product.

    Out of interest, what is stopping all new applications applying for a home loan and then renting flats out after their loan has been funded? Do lenders do any checks? Or is this a common trick lending managers are now adopting to reduce interest rates for clients?

    I know in the UK if you don’t convert the loan to a Buy to let (investment loan) you will be in breach of the home loan and insurance policy, effectively meaning your property will not be insured as you will be in breach of the insurance cover.But, I don’t insure the unit as the body corporate insures all the 6 units under the one building and common building cover and Public Indemnity.I know another two units are currently tenanted so I don’t think I will be in breach of the insurance cover as the insurance cover effectively captures both investment and owner occupied risk.

    My only issue is, if I decide to refinance later down the track converting it to a home loan may impact my ability to get a larger loan as I will not be able to rely on the rental income. I am willing to take this sacrifice.

    Are there any tax implications I am missing? I don’t negatively gear on this property so having it as an investment property doesn’t really impact me anyway.

    • This reply was modified 1 year, 11 months ago by Profile photo of propertyboy propertyboy.
    • This reply was modified 1 year, 11 months ago by Profile photo of propertyboy propertyboy.
    Profile photo of Jamie MooreJamie Moore
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    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Out of interest, what is stopping all new applications applying for a home loan and then renting flats out after their loan has been funded? Do lenders do any checks? Or is this a common trick lending managers are now adopting to reduce interest rates for clients?

    There’s nothing stopping them – but if they do get caught they may be penalised. It’s not common at the moment – but no doubt lenders will become more observant with tracking this into the future.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
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    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of propertyboypropertyboy
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    @propertyboy
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    What will they be tracking though? As I can’t see where I would be in breach of the standard loan terms. I just read the standard terms and conditions and I can’t seem to find anywhere that states consent to rent is required for a home loan. Maybe they have overlooked this as the terms and conditions were set before the differential in rates were set for investment and home loan products.

    • This reply was modified 1 year, 11 months ago by Profile photo of propertyboy propertyboy.
    Profile photo of JaxonJaxon
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    @jaxona
    Join Date: 2014
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    Well its simple.

    If the loan is structured as a owner occupied loan and that’s not your current and legal address they have something to argue in court.

    Propertyboy your bringing up a legal issue, better off asking or speaking to a lawyer for exact information and even then it really comes down to the recent court case and what the past has to say in these cases.

    Legality is complex and simple, best get real advice as to if this went sour.

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,173

    Jaxon, It would be extremely unlikely that such a matter would worry a bank let alone get to court.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of blackhotelblackhotel
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    @blackhotel
    Join Date: 2010
    Post Count: 139

    I currently have 6 home loans that I live in with 6 different banks. I’m not lining the pockets of those friggin banks, they make enough money from me thank you!

    Profile photo of JaxonJaxon
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    @jaxona
    Join Date: 2014
    Post Count: 282

    Ok well maybe I am wrong, I just wonder if there is grounds for them to recoup payments or if this is a legal loophole, I mean the fact they charge more for investment because they can isn’t fair or ethical in my books, but if there is a clause in a contract that puts you at risk for reimbursement from the lendee than I would not risk it personally. but Great to hear its working for you blackhotel. Happy someone is getting a sneaky on the banks haha

    Profile photo of KingKing
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    @jaydenwalter
    Join Date: 2016
    Post Count: 17

    I asked an in-house broker at ANZ about this and they didn’t really have an answer. They basically told me that that ANZ would never follow up with me to check what my intentions are with the property after settlement.

    Profile photo of BennyBenny
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    @benny
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    If the loan is structured as a owner occupied loan and that’s not your current and legal address they have something to argue in court.

    Hmm – that is an interesting thought !! And things in contracts – would have to be quite new wouldn’t they, as it was only APRA swinging its bat that had the Banks charging more for IP loans. All something to do with getting total IP loans below some percentage of all loans (was it 30%?).

    So now, if I am a Bank, and you buy a property to live in, then you are charged at Home Loan (lower) rate. Cool – but then you change your mind and make it an IP. I doubt the Bank would worry as your loan is “making up numbers” on the Homeowner side. That means the Bank may be able to make another IP loan to someone else without flopping over that 30% mark perhaps. Your loan is therefore in the “goodness” pile. You are helping the Bank !! :)

    I’m also picking they wouldn’t be chasing you. But then, I havent seen any new contracts written since that change earlier this year – are there any clauses in there re this? Ones that could bite?

    I dunno…..

    Benny

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    If the loan is structured as a owner occupied loan and that’s not your current and legal address they have something to argue in court.

    Hmm – that is an interesting thought !! And things in contracts – would have to be quite new wouldn’t they, as it was only APRA swinging its bat that had the Banks charging more for IP loans. All something to do with getting total IP loans below some percentage of all loans (was it 30%?).
    So now, if I am a Bank, and you buy a property to live in, then you are charged at Home Loan (lower) rate. Cool – but then you change your mind and make it an IP. I doubt the Bank would worry as your loan is “making up numbers” on the Homeowner side. That means the Bank may be able to make another IP loan to someone else without flopping over that 30% mark perhaps. Your loan is therefore in the “goodness” pile. You are helping the Bank !! :)
    I’m also picking they wouldn’t be chasing you. But then, I havent seen any new contracts written since that change earlier this year – are there any clauses in there re this? Ones that could bite?
    I dunno…..
    Benny

    Just a quick one Benny – you’ve got the general right idea why banks aren’t too worried about this. (besides the fact it would be an immense adminstrative burden to keep trying to get the right ownership type up to date for millions upon millions of loans) But the 30% cap is for amount of new interest only loans being written, not investment loans in general. There’s also the 10% year on year growth cap on investment lending which lenders have to abide to.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,366

    Hi Corey,

    Thanks for the extra words around all this.

    My mind ran away with this comment of yours:-

    besides the fact it would be an immense adminstrative burden to keep trying to get the right ownership type up to date for millions upon millions of loans

    Hehe – yeah, forget “Too Hard Basket” – their “basket” would have to be the size of an Olympic Swimming Pool !!

    ;)

    Benny

    Profile photo of propertyboypropertyboy
    Participant
    @propertyboy
    Join Date: 2008
    Post Count: 206

    Ok guys, just read the terms and conditions in detail.

    If you are on a Home Loan product, turns out you need consent from your lender to rent it out (big 4 bank). They cant unreasonably withold providing such consent. I have moved back into my PPOR but may need to move out again on sort notice. So I have decided to keep the mortgage as Investment to avoid hassles in the future with consents etc – not worth the interest I could save to convert

    • This reply was modified 1 year, 10 months ago by Profile photo of propertyboy propertyboy.
    • This reply was modified 1 year, 10 months ago by Profile photo of propertyboy propertyboy.
    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,173

    Are you sure about that? The ones that I have read have a similar clause, but another clause says you don’t need permission if renting out under a standard residential lease.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of propertyboypropertyboy
    Participant
    @propertyboy
    Join Date: 2008
    Post Count: 206

    Seems so

    Just looked at CBA’s terms also

    https://www.commbank.com.au/content/dam/commbank/personal/apply-online/download-printed-forms/utc-home-loan.pdf

    Page 28 (clause 11.2)

    and

    HL8 page 40

    Seem to indicate this to me

    I don’t want this burden and am happy to pay more in interest for no headaches down the track

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    Looks like you are right:
    =
    HL8. Owner occupation and leasing
    Note:
    This clause does not apply to investment loans.
    HL8.1 Consent to lease
    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
    (see clause 11.2).
    =

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

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