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Home loans for studio apartments

It's much harder to get finance for apartments under 50 square metres in size. You may need a larger deposit or take extra care when finding a lender.

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Australians buying smaller studio or one bedroom apartments often have difficulty getting a home loan. This is because your lender actually cares about the quality of your property. If you can't repay your loan, it has to sell the property to recover the debt. And very small properties like studios or small apartments are harder to sell.

To improve your chances of getting a loan for a small apartment approved, you can save a bigger deposit, shop around for a lender with more flexible lending criteria or get expert advice from a mortgage broker.

What conditions and restrictions apply to apartment loans?

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.

How to get approved for a studio apartment home 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 a bigger deposit

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.

Research lenders

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.

Get help where you can

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 on your loan. 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.

You could also talk to a mortgage broker. A professional broker knows the specific lending criteria of the lenders in their panel, and can help find one that lends for a small unit.

Check your credit score

Could there be blemishes on your credit history damaging your reputation in the eyes of lenders? Check your credit score to see if there are any negative listings and what you can do to remove them.

Why are there restrictions on apartment loans?

Home loans for apartments 2Lenders 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. This is especially true outside of major urban areas.

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.

Pros and cons of buying a studio apartment

Pros

  • 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.

Cons

  • 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.

Compare Home Loans

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Macquarie Bank Basic Home Loan P&IHome≥ 40% Deposit

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Greater Bank Great Rate Discount Variable with Family Pledge Home Loan P&IHome≥ -10% Deposit

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homeloans.com.au Low Rate Home Loan with Offset P&IHome≥ 40% Deposit

homeloans.com.au Low Rate Home Loan with Offset
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loans.com.au Smart Booster Discount Variable Home Loan P&IHome≥ 20% Deposit

loans.com.au Smart Booster Discount Variable Home Loan
2.74%
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Home buyers can get a very low discounted variable rate for the first year. Requires a 20% deposit. Add an offset sub-account for an additional 0.10% on your interest rate. Get your loan processed fast and settle within 30 days.

Unloan Variable Home Loan P&IInvestment≥ 20% Deposit Refinancers only

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Ubank Neat Variable Home Loan P&IHome≥ 20% Deposit

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2.84%
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A competitive variable rate loan that comes with a 100% offset account. 20% deposit required.

Macquarie Bank Basic Fixed Home Loan P&IHome 3Y Fixed≥ 30% Deposit

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Newcastle Permanent Building Society Real Deal Home Loan P&IInvestment≥ 20% Deposit

Newcastle Permanent Building Society Real Deal Home Loan
3.07%
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HSBC Home Value Loan P&IInvestment≥ 30% Deposit

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homeloans.com.au Low Rate Home Loan with Offset IOInvestment≥ 20% Deposit

homeloans.com.au Low Rate Home Loan with Offset
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homeloans.com.au Low Rate Home Loan with Offset P&IHome≥ 20% Deposit

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homeloans.com.au Low Rate Home Loan with Offset IOHome≥ 20% Deposit

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Credit services for Aussie Select, Aussie Activate and Aussie Elevate products are provided by AHL Investments Pty Ltd ACN 105 265 861 (“Aussie”) and its appointed credit representatives, Australian Credit Licence 246786. Credit for Aussie Select products is provided by Residential Mortgage Group Pty Ltd ACN 152 378 133, Australian Credit Licence 414133 (“RMG”). RMG is a wholly-owned subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL and Australian Credit Licence 234945. Credit for Aussie Activate products is provided by Pepper Finance Corporation Limited ACN 094 317 647 (“Pepper”). Pepper Group Limited ACN 094 317 665, Australian Credit Licence 286655 acts on behalf of Pepper. Credit services for Aussie Elevate products are provided by AHL Investments Pty Ltd ACN 105 265 861 Australian Credit Licence 246786 (“Aussie”) and its appointed credit representatives. Aussie is a trade mark of AHL Investments Pty Ltd ABN 27 105 265 861. Credit and any applicable offset accounts for Aussie Elevate are issued by Bendigo and Adelaide Bank Limited ABN 11 068 049 178 AFSL / Australian Credit Licence 237879.

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2 Responses

  1. Default Gravatar
    DavidMay 30, 2017

    Are there any lenders that now finance properties under 40sqm?

    • Default Gravatar
      LiezlMay 30, 2017

      Hi David,

      Thanks for your question.

      Although most lenders require at least 45 or 50 square metres of floor space, there are still lenders who finance smaller apartments. Unfortunately, we do not have them in our panel of lenders.

      If you’re looking for financing, it would be best to enlist the services of mortgage brokers who can help you find suitable lenders.

      Cheers,
      Liezl

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