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Home loans for apartments

It's harder to get a home loan approved when buying off-the-plan apartments, apartments smaller than 40 square metres, or apartments in postcodes with an oversupply of similar properties.

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By

Richard Whitten

Updated

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Lenders are more cautious when approving home loans for apartments. This is because the lender uses your property as security for your loan. Apartments can be harder to sell than houses, especially small apartments or studio apartments.

To improve your chances of getting a loan for an 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.

Why was my apartment loan application rejected?

Every lender has their own restrictions about apartment lending. But here are the most common reasons your apartment loan application could get rejected.

1. The apartment is too small

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.

2. No separate bedrooms (studio apartment)

If the apartment doesn't have separate bedrooms it is a studio apartment. Some lenders won't lend for these properties, or require a bigger deposit.

3. Postcode restrictions

Each lender keeps its own list of postcodes with a high number of apartments. If you're buying in a postcode with a high concentration of apartments your lender might reject your application, ask for a bigger deposit or limit the amount you can borrow.

4. The apartment has a company or stratum title

Most apartments have a strata title. But there are other property titles, such as company or stratum titles. These are much less common, and ownership is structured differently. Lenders are reluctant to lend to anyone buying an apartment with a company or stratum title.

5. The property is not a residential apartment

It's much harder to get a home loan if you're buying an apartment that isn't designated as a residential property. This includes commercial properties or serviced apartments.

6. You're buying off the plan

When you buy an off-the-plan apartment you're often putting money down before the apartment is built. A lot can happen in the months and years between signing the contract and the completion of construction. Prices can fall. Your lender might reject your loan application or value the apartment below what you paid for it.

In that case the lender might approve a smaller loan amount, forcing you to come up with extra cash to meet the shortfall.

4 tips to help get your apartment loan approved

money

1. Save a bigger deposit

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.

Magnifying glass

2. Check with multiple lenders

Every lender has different rules, restrictions and appetite for risk. Just because one lender doesn't want to lend to you doesn't mean another won't.

Enquire with a few lenders and ask if they have restrictions on apartments in the postcodes you're looking to buy in. Importantly, don't submit full applications. Ask about the restrictions before applying.

Helping hand

3. Get help where you can

A mortgage broker can help you find a lender that has no issues with your apartment or postcode. If your deposit is too small, you could boost your borrowing power with a guarantor.

Paper

4. Check your credit score

Check your credit score to see if there are any negative listings or errors on your credit report. Dealing with these improves your chances of getting a home loan approved.

Example: An apartment buyer shops around for a home loan

Brian has just signed a contract to buy a 2-bedroom apartment in inner-city Melbourne. He has a 20% deposit saved. He also has pre-approval with his bank.

But when he applies for a loan the bank says he'll need a 30% deposit. Why? Because there are lots of 2-bedroom apartments in his postcode and the bank's worried it is over-exposed to this type of property.

Brian can't come up with a 30% deposit on top of stamp duty and everything else. Instead, he enquires with an online lender. Before applying he emails the lender and is put in touch with someone from the credit assessment team. They assure Brian that there's no issue with his address or postcode, and a 20% deposit is fine.

He applies, is approved, and buys his apartment.

Why are there restrictions on apartment loans?

Any loan represents a risk to the lender. If you can't repay your loan for any reason, the lender can force the sale of your property and recover your debt. Lenders are reluctant to approve loans for properties they think are harder to sell.

This includes smaller apartments and studio apartments, especially if these properties are located outside major urban areas or in postcodes with a high concentration of apartments.

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.

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2 Responses

    Default Gravatar
    DavidMay 30, 2017

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

    Reply
      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

      Reply
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