Does ‘investor’ mortgage lending criteria really apply to your situation?
Due to the recent APRA initiated lending changes, a significant gulf has opened up between the pricing and credit criteria associated with investors vs. personal purpose borrowers for many lenders.
This article is aimed to help people whose situations aren’t easily discernible to get a grasp of what pricing & credit criteria should apply to their mortgage finance.
How are owner occupier & personal purpose mortgages defined?
- If the borrower’s loan purpose is to purchase, improve or renovate a home as their place of residence and the borrower(s) will personally occupy the property, or refinance lending for that purpose, the aligning product would typically be referred to as an owner occupier home loan (individual lenders may use their own nomenclature).
- This classification also includes any lending against a property that is not predominantly for personal purposes i.e. travel, renovations for a primary residence, car purchase, shares.
What is the definition of an investor loan?
- If the purpose of the loan is to purchase, renovate or improve a residential investment property (or refinance), that will be used predominantly for investment purposes, the aligning product would typically be referred to as a residential investment loan (individual lenders may use their own nomenclature).
What is meant by ‘predominant investment purpose’?
- A property will be deemed to be used predominantly for investment purposes, where either:
- A property is expected to or will generate income for more than 6 months of a 12 month period or,
- More than 50% of a property will be used to generate income, or
- Where the customer’s intended purpose is not to occupy the property but to make investment returns from income and/or capital gains.
- NB: If a customer tells the lender the purpose for purchasing a property is predominantly for investment (income and/or capital gains), even if they also use the property for personal residence, the aligning product will generally be a residential investment loan (as this fact overrides the 50% rule).
Examples of when predominant purpose applies for properties that may have multiple purposes
Holiday home examples
- Customer owns a holiday home which is used for personal residence and not for investment purposes = owner occupier home loan.
- Customer owns a holiday home which is expected to generate income (rent and/or capital gains) for >6 months a year = residential investment lending.
- Customer owns a holiday home which is used for personal residence for > 6 months a year = owner occupier home loan.
- If a customer’s predominant purpose for purchasing a property is for investment (income and/or capital gains), even if they also use the property for personal residence then the appropriate loan type is residential investment lending.
Assistance of a family member
- Customer owns a property for a family member to occupy and pay no rent for = owner occupier home loan.
Short term rentals
- Customer owns a property that is their primary residence but is also periodically rented i.e. 1 weekend a month = owner occupier home loan.
- NB: The catch here is that the short term rental income may not be considered regular or sustainable and therefore would not be eligible to assist with serviceability assessment.
Partial Rental / Partial Primary Residence
- Customer owns a 4 bedroom property that is their primary residence, but rents out 1 room = owner occupier home loan.
- NB: Rent from individual rooms or boarders are generally not acceptable forms of rental income to count towards loan servicing.
- Customer owns a property that is their primary residence, but rents out their granny flat (Multi-Dwelling) = owner occupier home loan.
- NB: For multi-dwellings on a single title (i.e. granny flats), rental income can be used with serviceability assessment where a suitable lease arrangement is evident.
Immediate Purpose is different to future purpose
- Customer purchases a property today to rent out immediately with a view to occupy as their primary residence in future = residential investment loan.
- NB: Customers should notify the lender when their circumstances change i.e. when they personally occupy the residence.
If you’d like some further guidance, please feel free to contact the friendly team at Naritas to discuss your situation.