There are always a lot of hoops to jump through when you are relying on someone else’s money to fund your home of choice.
Regardless of whether you’re looking to purchase a $1.5 million town house to live in or a $500,000 unit to rent out, chances are you’ll need at some stage to rely on a bank or a credit union to fund part of your property investment.
But what you may not know is that the location, type and size of your chosen abode can have a significant impact on the amount of money your bank or credit union is willing to lend you.
Richard Whitten, of comparison site Finder says whether you choose to approach a bank, credit unions or non-bank lenders, every home loan lender in Australia imposes lending criteria on the loans it offers.
Designed to minimise the level of risk to the lender, these criteria – which individual lenders don’t often make public – ensure that they only loan money to borrowers who are well placed to service the loan and pay back their debt, Whitten says.
“Of course, individual suburb and property factors will always affect your chance of getting finance. As will the size of your deposit and history of savings.”
Homeloanexperts managing director Otto Dargan, whose agency deals with around 30 different lenders, agrees owners and would-be owners of strata units face some unique challenges when obtaining finance.
Dargan, whose group focuses on specific lending niches that are difficult to get approval for, says the biggest hurdle is obtaining financing when lenders have restrictions on lending is for those who are attempting to buy a strata unit in a block over four stories in height, certain postcodes, different title types (company title, stratum title etc), inner city units, new developments, and unique uses such as dual-key or serviced apartments.
Dargan says lenders are behind with the times when it comes to the changes in Australian households, especially as it relates to their concerns about small units where investors looking to buy into strata units under 40 square metres usually encounter some difficulties obtaining financing.
“There’s a lot of people who love a small studio apartment in a great location yet from a lenders point of view they are worried that a small unit may be difficult to sell which makes it a higher risk. Is it? We don’t think so. If anything, the smaller units in great locations seem to have more potential buyers than a house does.”
In September 2015, various Australian media outlets reported that big four bank NAB had tightened its lending to home buyers in more than 80 suburbs around the country, with loan applicants restricted to borrowing just 70 or 80% of the property’s purchase price.
Macquarie Bank made a similar move in May 2016 when it boldly named 120 Australian suburbs where buyers of high-rise apartments could only access a maximum loan to valuation ratio (LVR) of 70%.
Dargan says the way that lending works has tightened even more in the past three years and getting a home loan is much harder than it was before – particularly if you’re looking to purchase a property in what lenders consider an “oversized suburb”.
“Oversupplied suburbs tend to be areas where there is a lot of construction and new high rise buildings. Some examples are the CBD of Brisbane and Melbourne including Southbank, Spring Hill and Fortitude Valley. In Sydney there are many suburbs away from the CBD which are considered higher risk for example Rhodes, Hurstville, Hornsby and Parramatta.”
Because of this Dargan recommends that if you are buying a unit in these areas that you proceed with caution as these areas are more likely to have fluctuations in price.
“In particular if you want to sell your apartment and there is a block of 200 apartments going up for sale next door then it’s going to be much harder to compete and so you may not get as good a price. It’s for this reason that lenders are cautious and may limit the amount that you can borrow. The good news is that in almost all areas there are one or two lenders who can still approve a 95% loan.
“We’re seeing that lenders are particularly cautious for new buildings and off the plan purchases which is making it harder to sell these units.”
Duggan says it’s important that investors considering obtaining financing for an investment in strata do their homework prior to approaching their chosen lender to obtain a mortgage.
Australia isn’t just one property market and even within the capital cities there are suburbs going up in price at the same time that others are going down.
For that reason, Duggan encourages his investor clients to look for suburbs or towns that are gentrifying, or where the government is building new infrastructure as these areas tend to do better.
Evidence points to the fact that in many areas of Australia the prices for newer properties may drop and there could be some great buying opportunities within the next year, he says.
“Generally we see our investors do better from investing in older apartments that don’t have amenities such as a pool, gym or lift as the rents are usually good and the strata fees are low. A new building may depreciate in value in the first few years the same way that a new car does.”
In addition, he also advises would-be investors to take a strategic approach when seeking to circumnavigate their way around lender restrictions on strata property.
“We actually think you should talk to a mortgage broker or your lender three to six months before you plan to buy as then you can make some changes to your situation, for example reducing your living expenses, before you apply for a home loan.
“Right now the lending market is very tight so it’s important to get a pre-approval before you start looking for a property. Sometimes we see customers waste months looking for property only for them to talk to us when they find something and we let them know that they can’t borrow as much as they would like.”