Requirement to change mortgage from OO to Investment

LNotBot on 18/05/2022 - 21:40

Hi Everyone,

Wife and I have recently had to make the unfortunate decision to move back to our birth country temporarily (likely a few years) for personal reasons.

We own a house in Sydney and are planning on renting it out whilst we are based overseas as we plan on moving back once we are able to and don't want to be priced out of the market when the time comes.

In regards to the mortgage, once the property is being rented out are we required to change the mortgage to an investment property loan?

Some questions below if anyone knows anything:

If so:
- As a portion of our mortgage is fixed would I have to pay the break fee?
- Neither of us are currently employed, would that mean they couldn't refinance to an investment loan anyway?
- Are there any consequences for not changing the loan type?

If not:
- Are we still able to claim interest deductions?
- Any other negatives of keeping it OO?

Thanks heaps for any information that people can pass on, please let me know if I have missed anything vital. We have never rented out a property before so trying to pick everything up as fast as possible. Also trying to get an idea on what we need to do before contacting the bank and potentially getting ripped off as money is a bit tight with the moving costs etc.

Financial

Comments

  • bemybubble on 18/05/2022 - 21:57
    +1

    In regards to the mortgage, once the property is being rented out are we required to change the mortgage to an investment property loan?

    No. It’s the purpose of the funds, not what the bank calls it that determines if it’s deductible.

    It is also worth seeing if a quantity surveyors report is worth doing. That will help.

    • NotBot on 18/05/2022 - 22:39

      Thanks for that advice will look into that, is the quantity surveyor report for the depreciation deductions?

      • bemybubble on 19/05/2022 - 06:19
        +3

        That’s correct

  • Muzeeb on 18/05/2022 - 22:05

    Are we still able to claim interest deductions?

    I'm not an accountant but I would assume you would need to have another Australian income source (other the rent from your house) and paying income tax on that to be eligible to claim interest (negative gearing).

    • Quantumcat on 18/05/2022 - 22:39
      +2

      If the rent is over the tax free threshold they can claim all costs to bring it back down under the threshold so they won't have to pay any tax. Rent money is still income, it doesn't have to be from another source

      • spal on 19/05/2022 - 08:51
        +1

        If they live overseas for an extended period of time, they will be considered non-resident. Non-residents do not have tax free threshold.

        • Quantumcat on 19/05/2022 - 09:10
          +2

          Ah. Even more important to claim every expense then!

    • NotBot on 18/05/2022 - 22:40

      The rent will be our only Australian income while we are overseas so will have to look into that thanks.

  • kev98 on 18/05/2022 - 22:11
    -2

    Don’t tell bank, you will be charged investor loan interest rate and they don’t really check/care in my experience if it is leased. You may also need to send in all your income info etc if you notify them. More headache than it’s worth

    • NotBot on 18/05/2022 - 22:42

      That’s pretty much my main worry that I would be opening up a can of worms bigger than I needed to. Much better to get useful advice from OzB community first! Are there any repercussions for not declaring it to the bank that you know of?

      • SF3 on 18/05/2022 - 23:33

        Perhaps you can speak to someone at the bank, since you are not making any changes now, you could ask them your question as a what-if, and see what they say.

    • dogboy on 19/05/2022 - 09:29
      +1

      My bank somehow found out I had changed my house to an investment property and made me change my loan type. Now paying ~4.5% interest rate. NAB btw.

      • NotBot on 19/05/2022 - 09:34

        Was wondering what might happen if they did find out, did they do anything other than just change you to an investment loan?

        • dogboy on 19/05/2022 - 09:45
          +2

          No. They seemed a little miffed that I didn't tell them but to be honest I had no idea there was a separate loan type for investment properties.

  • Alexander420 on 18/05/2022 - 22:54

    If you don't have any other loan other than this property don't stressed too much about it. Pm me if you need further info, I might be able to help.

  • nedski on 18/05/2022 - 23:37
    +3

    I have kept mine at the OO rate for a few years now.

    However one thing to keep in mind, is that you are no longer Australian residents for tax purposes, which means you dont get the tax free threshold. You pay 30% tax for every dollar you make.

    • NotBot on 19/05/2022 - 09:22

      Hadn't considered that one thanks, will talk to an accountant once we have everything a bit more sorted.

  • Rescue 26 on 19/05/2022 - 06:56

    I've been in a similar situation several times. You may or may not be considered Australian residents for tax purposes - it's somewhat of a grey area. Have a look at the ATO website. This will have a bigger impact on you financially than the status of your mortgage. FWIW I wouldn't tell the bank about your change in circumstances but I believe you should tell your insurer.

    • NotBot on 19/05/2022 - 09:22

      Will do and will also get landlord insurance.

  • capslock on 19/05/2022 - 07:24
    +2

    Don't tell the bank unless it bothers you and you can't sleep at night. Personal wellbeing is more important.

  • Jason Genova on 19/05/2022 - 07:33
    -1

    make sure you pay tax on any rental income

  • 0FoxGiven on 19/05/2022 - 08:49
    -1

    Interesting. Seems like the general consensus is not to tell the bank.

    Now I have a question. So if I have an OO property with a mortgage now and I plan to move into another property, can I still get an OO loan for the second property without changing the first to Investment?

    • spal on 19/05/2022 - 08:56

      I have multiple OO loans. Funnily though, I am paying investment rates for part of my OO property. The bank manager showed our home as investment (higher potential rental) and investment as home. Didn't bother to tell me. I only found out three years into the loan. This is direct with a bank, no brokers, and have been with them for about 15 years. So, they know everything they need to know.

    • capslock on 19/05/2022 - 09:23

      Sure, if you get your loan from a different bank.

      • spal on 23/05/2022 - 08:33

        That is the plan. Currently, going through the process of subdivision, and I will apply after it is complete.

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