Where you buy can have a significant effect on how much a lender is willing to let you borrow.
In September 2015, Australian media outlets reported that 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 named 120 Australian suburbs where buyers of high-rise apartments could only access a maximum loan to valuation ratio (LVR) of 70%.
Why do lenders impose these home loan postcode restrictions and what do they mean for borrowers? Let’s take a closer look.
Why do lenders impose home loan postcode restrictions?
From banks and credit unions to non-bank lenders, every home loan lender in Australia imposes lending criteria on the loans it offers. These criteria are designed to minimise the level of risk to the lender, ensuring that they only loan money to borrowers who are well placed to service the loan and pay back their debt.
Home loan postcode restrictions offer another way for lenders to reduce risk. The simple fact is that mortgage defaults occur more commonly in certain areas and on specific property types, so by imposing tighter lending restrictions on buyers in those locations, a lender can limit its exposure to people defaulting on their loans.
In many cases, including the NAB and Macquarie examples above, home loan postcode restrictions involve lower LVRs. However, a lender may also refuse to lend any money at all to borrowers who want to buy in a specific area.
Which postcodes are restricted and why?
Postcode restrictions usually apply to specific areas and types of housing, including:
- Rural areas. It can be quite difficult to find financing to buy property in a small rural town. Not only are lenders put off by remote locations and small populations (and therefore small demand), but a lack of similar sales in the area can also make it hard for a bank to determine the property’s market value.
- Inner-city apartments. Properties located right in the CBD of a major city are almost always high-rise apartments. There can often be an oversupply of apartments in these areas, making them harder to sell.
- Mining towns. Any town that relies on a single industry to survive will be viewed as a high-risk location by lenders. In particular, mining is a real boom or bust industry, so while property prices can soar during peak times, if the industry experiences a downturn then prices will plummet.
- Islands. Properties located on islands with boat-only access can also be difficult to find finance for.
A bank may also decide to restrict lending in a particular area if it decides that it already has too much exposure in that location. So if a bank has already approved a large number of mortgages in a specific suburb or even in the one high-rise development, it may not be willing to approve any more loans in the same location.
Are there different levels of restrictions?
Each lender has its own system for classifying postcodes in Australia based on their level of risk. While these systems vary between lenders, there are generally five categories:
- Metro Plus. These are established properties in popular inner-city locations and are extremely low-risk.
- Category 1. Suburbs in this category are high-population areas in capital cities around Australia. Classified as low-risk.
- Category 2. Medium-sized regional centres are in this category and are seen to pose low to medium risk.
- Category 3. Small towns with volatile property prices, classified as medium to high risk.
- Other. This category includes high-density apartments in inner-city suburbs and properties in areas that don’t fit into any other categories. They are classified as very high-risk.
But just because a suburb is in a restricted-lending area now does not mean it will stay there in the future. Banks regularly review their lending policies to reflect changing market trends and to maintain an acceptable level of risk.
What do postcode restrictions mean for borrowers?
The biggest disadvantage of these postcode restrictions is that they make it harder for borrowers to break into the property market. With access to low-LVR loans only, you’ll need to save a larger deposit before you can qualify for a loan.
As an example, consider the suburb of Granville in Sydney’s west, which was included in NAB’s list of restricted suburbs. The median house price in Granville is $860,000, so with NAB only allowing a maximum LVR of 80%, you would need a 20% deposit of $172,000 just to qualify for a loan.
The other risk is that you may not be able to access any financing at all to buy in the postcode you want. While this is frustrating and very inconvenient, you may also want to consider the reasons why a lender doesn’t offer loans in your particular area - it may cause you to rethink your decision to buy.
However, just because one lender imposes restrictions on a postcode doesn’t necessarily mean the next lender will. That’s why it pays to enlist the services of an experienced mortgage broker to help you hunt around for the right home loan.