Same Income, Different Strategy: Unlocking Your Borrowing Power in Property Investing

Healthcare Home Loans
Jul 7
2 min read

Updated: Jul 23

Understanding the Difference in Borrowing Power Between Owner-Occupied and Investment Properties

As a healthcare professional preparing to enter the property market in FY25/26, it's essential to grasp how your borrowing capacity varies. This difference hinges on whether you’re purchasing a home to live in or an investment property.

Owner-Occupied vs. Investment Property Loans: Key Differences

Interest Rates

Owner-Occupied Loans: These typically feature lower interest rates. Lenders view them as less risky.
Investment Loans: In contrast, these usually have higher interest rates because of the perceived higher risks. Rental income can fluctuate.

Loan-to-Value Ratio (LVR)

Owner-Occupied: Many lenders allow a maximum LVR of up to 95%. This means you can borrow up to 95% of your property's value. Most lenders prefer an 80% LVR to avoid high fees, like Lenders Mortgage Insurance (LMI).
Investment: The standard LVR for investment properties is generally capped at 90%. Consequently, you'll need a larger deposit. However, some healthcare professionals can borrow up to 95% and avoid LMI altogether.

Borrowing Capacity

Owner-Occupied: Your borrowing capacity is assessed mostly based on your personal income and existing debts.
Investment: Here, lenders might consider a portion of the projected rental income, which could improve your borrowing capacity.

Leveraging Rental Income and Tax Benefits

When buying an investment property, lenders frequently take into account a portion of the expected rental income as part of your income. This inclusion can bolster your borrowing capacity. Additionally, investment properties come with notable tax benefits, including:

Loan Interest: The interest on your mortgage payments may be tax-deductible.
Depreciation: You can claim depreciation on the building and specific fixtures, which reduces your taxable income.
Operating Expenses: Costs associated with property management, maintenance, and insurance can also be deducted.

These tax benefits can significantly enhance your cash flow. As a result, it makes it easier to manage your loan and potentially increase your borrowing capacity.

Flexibility in Loan Structures

It's crucial to understand that your loan's classification isn't set in stone. If your circumstances change, such as moving into your investment property or renting out your owner-occupied home, refinancing or re-structuring your loan may be possible. The process can vary by lender; some may require a complete reassessment, while others might facilitate a more straightforward transition.

Case Study: Enhancing Borrowing Power

Let's examine a case study of a nurse earning $90,000 annually and their purchasing options:

Owner-Occupied Scenario:

Under this scenario, based strictly on personal income, the borrowing capacity rests around $460K to $500K. The final amount can vary based on the lender.

Investment Scenario:

Utilizing 80% of the projected rental income, say from a property generating $500 per week, the borrowing capacity could surge to approximately $700K to $720K.

By this example, you can see how choosing to purchase an investment property can bolster your borrowing capacity through additional income considerations.

Conclusion

Understanding the distinctions between owner-occupied and investment property loans is crucial for making informed choices in the property market. Factors such as interest rates, borrowing capacity, and tax benefits play pivotal roles. By aligning these factors with your financial goals, you can formulate an effective strategy for your property purchase.

Ready to Explore Your Options?

Book your free FY25/26 Setup Session today. We will help you assess your borrowing capacity and create a customized strategy for your property investment journey.