Before you go out looking for an apartment to purchase it’s worth having a quick chat about how much a lender will let you borrow against that type of property. There are some types of property that lenders love, and there are some types that they really don’t want to get involved with. If they don’t want to get involved with it, that means you will need to put in more of your own money because they will not lend you as much, or in some cases they simply won’t give you a loan for it. Apartments can be something that lenders are wary of. Let’s take a look at why, and what it means to you.
A Bit of Background
There has been a lot of building of inner city apartment blocks in recent years and many lenders allowed people to take out loans against them. But lenders regularly review their portfolios to make sure that they don’t have too many of their eggs in one basket and in the last couple of years inner city apartments, particularly as investment properties, have not been popular with quite a few lenders.
If a lender finds that they have too many loans on one type of security they can reduce the number of future loans that they are willing to take against the same type of security, so that they can reduce their risk. That happened in the last couple of years when AMP stopped doing investor loans, and Commonwealth Bank recently did the same – not taking on any new investor loans or refinancing any investor loans! The other, more subtle, way they can do it is to have a policy that they don’t lend on certain types of investments or they limit the amount they will lend.
Lenders have Niches
Each lender has particular niches that they are comfortable in, and they all have some types of loans or properties that they don’t do as well as other lenders. That’s where knowledge of the lenders, and access to the fine print of their policies comes in very handy. You would be unlikely to know what the policies are of a certain lender until you applied for a loan with them and were either approved or denied. Even then they may not give you any explanation of why the loan was not approved, so you might assume that no lender would give you a loan. When looking to get a loan it’s worth using a Finance Broker so they can check each lender’s policies to see whether they will be interested in offering you a loan. Let’s look at units to see how much variation there is in different lender’s policies.
Inner City Apartments – If the apartment will be owner occupied it may be possible to get a loan for up to 95% of the purchase price, but if it will be an investment property the maximum loan quickly drops to 70% but some lenders will lend above 70% of the purchase price if Lenders Mortgage Insurance is paid.
Some lenders will not lend against inner city apartments at all!
Studio Apartments – Some lenders will not give loans on studio apartments. Others are happy with them but they need to have a floor area of more than 40sqm and be self contained (so with their own kitchen/kitchenette, bathroom and laundry). You don’t tend to see it in the newer apartments but some of the older, smaller apartments around Kings Cross in Sydney have shared laundries and some even have shared bathrooms! They can be quite cheap to buy and part of the reason for that is that lenders will not give loans on them, or not at good interest rates. Since the lender doesn’t have control over the whole asset they find it too risky to get involved in.
Bedrooms – Instead of saying that they don’t give loans on studio apartments some lenders specify that an apartment must have a separate bedroom. It means the same but the wording is different!
Lender Policies Change
I always find it interesting that the minimum unit floor area now needs to be more than 40sqm because the first investment property that I ever bought was a studio in Kings Cross with a floor area of just 26sqm, and a common laundry! I still own it today, more than 20 years later and it must have had less than 6 weeks without a tenant in that whole time. I would call that extremely low risk for a lender. But here is where risk becomes important to the borrower (you and I!). Since the lenders have policies stating that the minimum floor area for an apartment needs to be 40sqm I cannot refinance the tiny loan on that studio apartment, not even with the lender who I have the loan with. I have to keep the loan the same and stay with the lender who originally gave me the loan, and this means that it limits my options as far as getting the lowest interest rate, or a different type of loan, or releasing the equity built up in that property. My point is, if you purchase something that is difficult to get finance for in the first place, you will probably find it difficult (or even more difficult) to get finance for it again further down the track.
It may also cost you more to get the loan as you’ll see here:
Apartment Floor Area – Some lenders require that the floor area of any unit is greater than 50sqm, and some insist that this floor area does not include the balcony, car park or storage areas. It may be possible to get a loan on a unit of less than 40 sqm with ANZ but it must be fully self contained (as I mentioned for studios this means it has a kitchen/kitchenette, bathroom and internal laundry). The sticking point here is they will only lend up to 60% of the property value! So that will be a lot of your own funds tied up in the purchase of the property whereas if you bought a larger unit you could borrow up to 95% of the purchase price!
Number of Apartments – Lenders may also reduce the amount you can borrow if the property is a High Density Unit. High Density Properties are usually defined as having more than 35 apartments in the complex. Some lenders use the postcode of the suburb rather than the individual complex size to determine whether they will give a loan on a property. In these cases they have High Density Zones where they want to restrict the number of loans (and amount of risk) that they have in these areas. High density property loans will usually go up to 70%. Some lenders may allow a loan up to 80%, but will require payment of Lenders Mortgage Insurance to borrow more than 70% of the purchase price. This increases the purchase cost of the property.
Apartment Block Height – They may also have limits on the number of stories of the building, so for example they will only lend funds if the building is less than 8 stories tall!
Serviced Apartments or Holiday Let – Some lenders may look at these as long as the apartment can be permanently rented out (not just used as a hotel room) but the majority of lenders will not accept them as security. Again, we can probably arrange finance for you to purchase one, but you will never have the full range of lenders and loan options available to you so make sure that you are comfortable with limited lending options. This may mean, for example, that you will pay a higher interest rate on the loan than you would if the apartment was a standard rental apartment.
So Should You Buy An Apartment?
If you are buying it to live in, lenders are generally very comfortable to give loans on apartments, other than some restrictions in the high density blocks and inner city areas. For investors it becomes important to shop around to get the best loan.
As you can see there is a lot of variation in how much a lender will lend against a unit, particularly when it comes to floor area, suburb, height of building and what it is used for. If you get turned down by one lender don’t assume that other lenders will not give you a loan – they may have a slightly different policy that will work in your favour. For example, if you were trying to buy a unit on the 9th floor of a building and the first lender you try won’t lend on any buildings that are more than 8 stories high!!
If you’re not keen on shopping around for a loan you can always use a Finance Broker. Most don’t charge you a fee for their service because they are paid a commission by the lender and they can look at all the policy details to check which lender is the most likely to want to give you a loan. This can save you a lot of time and frustration!! Just pop your details in our Enquiry Form if you’d like us to find a loan for you.
Do you have any questions about buying apartments? Or maybe you’ve had an experience with applying for a loan for an apartment that you’d like to share? I’d love to hear it!