How to get a home loan for a studio apartment approved
If you’re looking for finance to buy an apartment, finding the right home loan is crucial.
Australians buying smaller studio or one bedroom apartments often have difficulty getting a home loan. This is because lenders view small properties as harder to sell. And if you can't repay your loan then your lender may have to sell your property to recover its losses. Your property is a riskier prospect.
The good news is that there is plenty you can do to improve your shot at getting the right apartment loan. You may need to save a bigger deposit, shop around and find a lender with more flexible lending criteria or get expert advice from a mortgage broker, but it can be done.
The exact regulations and restrictions for apartment loans are affected by each lender’s willingness to accept risk. Here are some common conditions for apartment loans.
- Size limits. Most lenders impose restrictions on the minimum size of an apartment. As a general rule, the apartment will need to be at least 45 or 50 square metres (excluding the balcony and any car spaces) in order to qualify for a loan. If your apartment is smaller than this, finding the funds you need may be quite difficult.
- Deposit requirements. Lenders will always consider the property value in relation to the loan amount, also known as the loan-to-value ratio (LVR). For small apartments of less than 40 square metres, you most likely won’t be able to borrow more than 80% of the property’s value, which means you’ll need to have a deposit of at least 20% of the purchase price ready to go. The maximum LVR you will usually be able to borrow is 90%.
- Bedroom requirements. Many lenders will require the apartment to have a bedroom that is separate to the living area, which means they will not provide financing for studio apartments. Others may refuse to finance apartments in buildings with communal laundries.
- Limits to exposure. Some large lenders will also look to limit their exposure to individual developments. For example, once a lender has funded a certain percentage of purchases in a new apartment complex, it may refuse to offer loans for any more apartments in the same complex.
- Low doc. It’s highly unlikely that you’ll be able to find a lender willing to offer a low doc loan on a small or studio apartment. This is because the combination of a less marketable apartment with the increased danger of lending to a low doc borrower represents an unsatisfactory level of risk for many lenders.
- Property use. Some lenders will only finance loans for apartments designed for residential use. Properties that are managed as part of a hotel or resort, for example, may not qualify for a loan.
While it might not be as easy to get a loan for a small apartment as it is for a larger apartment or a house, there are still plenty of things you can do to improve your chances of being approved for a loan.
- Save. It doesn’t matter what type of property you’re buying, the larger the deposit you’ve saved, the greater your chances of approval. Having a minimum 20% deposit saved can significantly increase your borrowing power, so build a strong savings balance before you approach any lenders.
- Do your research. In order to find the right property and minimise the level of risk you present to potential lenders, it’s important to do your research. Lenders will consider a property’s location and features to determine how easy it will be to sell in future, as well as market trends and the sales performance of similar properties in the area. If you’re purchasing a property that ticks all the right boxes for resale potential, your loan application is likely to be viewed more favourably by lenders.
- Seek help. If you’re a first home buyer and the deposit and LVR restrictions imposed by lenders are limiting your ability to qualify for an apartment loan, consider asking your parents to go guarantor. If you take out a guarantor home loan, which involves listing your parents’ property as security on the loan, you may be able to borrow up to 100% of the purchase price. These types of loans do come with their own risks, so research all your options before deciding on the best solution.
- Check credit file. Could there be blemishes on your credit history damaging your reputation in the eyes of lenders? Check your credit file to see if there are any negative listings and what you can do to remove them.
Lenders are always looking to minimise risk. Some are more conservative than others, but every lender will look to avoid risk as much as possible. If something goes wrong and you default on your apartment loan, the lender would look to sell the apartment to recoup the losses.
With this in mind, lenders prefer to fund the purchase of properties that can be sold quickly if you’re unable to keep up with your repayments. As a general rule, smaller apartments are considered to be harder to sell than larger ones, with banks believing that there will be fewer potential buyers interested in the property.
If you’re looking at studio apartments, which don’t have a wall between the bedroom and the living area, keep in mind that they are particularly difficult to sell, so you may struggle to find a lender willing to offer the finance you need.
The conservative approach of the banks is also influenced by mortgage insurers, who offer lenders mortgage insurance (LMI) to protect the bank if you default on your loan. These insurers generally won’t cover properties under 40 square metres, so the banks have little choice but to follow suit.
- Cheaper. Apartments are cheaper to purchase than larger units and houses.
- Close to the city. Studio apartments in particular are found in sought-after inner-city locations close to work, transport and heaps of entertainment options.
- High rental yield. If you’re a property investor, studio apartments can often generate substantial rental income.
- Lending restrictions. Lenders place limits on the amount you can borrow and the size of the apartment.
- Limited capital growth. While studio apartments often provide high rental yield, they don’t always provide good opportunities for capital growth.
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- Identify your needs. Before you start looking at real estate websites and attending inspections, take the time to put together a wishlist of what you want in a property. How many bedrooms do you want? What sort of facilities should the complex have? Where is your ideal location? Is a car parking space essential? Once you know what you’re looking for, you can start to see what’s out there.
- Know your budget. Working out how much you can comfortably afford to spend is crucial. The last thing you want to do is get in over your head and end up with a debt you can’t repay, so consider your income, your assets and your ongoing expenses to work out a realistic apartment-shopping budget.
- Understand the market. Next, it’s important to develop an understanding of the real estate market in the area where you’re planning to buy. Is it a buyer’s or seller’s market at the moment? What prices have similar apartments fetched in recent times? How great is the current demand for apartments in the neighbourhood? Once you know how the real estate market is performing, you’ll be able to work out which apartments for sale represent good value for money.
- Shop around. The last step in the apartment-buying process is to compare all of the available options and shop around. Do multiple searches of online real estate listings to see what is available. Attend several inspections to get a better feel of what you can get for your budget and to help validate your ideas about exactly what you want in an apartment.
- Consider using a buyer’s agent. If you’re shopping in a particularly competitive market, you may be able to benefit from a professional buyer’s agent. Buyer’s agents have specialised knowledge of the real estate market and can do all the hard work to help you find the perfect apartment.
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