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How home loan postcode restrictions really work

If you're buying a property in a restricted postcode, your lender may reject your application or approve you for a smaller loan amount.

Before a lender will give you a home loan, it checks that your property is suitable to act as security for your loan. When it does that, it looks at the location. Home loan postcode restrictions mean your lender sees your suburb as a red flag for some reason. This could be because of an oversupply of units, or because the postcode is in a rural area with few properties and higher risk.

Why do lenders impose home loan postcode restrictions?

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.

The fact is that mortgage defaults occur more commonly in certain areas and on specific property types. By imposing tighter lending restrictions on buyers in those postcodes, a lender can limit its exposure to people defaulting on their loans.

Every lender has different rules and offers different restrictions for different postcodes. If you try to buy a property in a restricted postcode, one of two things may happen:

  • Reduced LVR. Some lenders offer loans with 80% loan-to-value ratio, meaning you need a 20% deposit. But if you're buying the wrong property type in the wrong postcode, a lender could lower your LVR to 70%, requiring a 30% deposit instead.
  • Rejection. The lender may simply reject your application completely. In this case you need to find a new lender.

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.
  • Very small homes. Properties that are smaller than 50m2 often have a very small re-sale market, so they're considered riskier by lenders.
  • 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 already has lots of mortgages on properties in the area. If a lender has already approved a large number of mortgages in a specific suburb or in the same high-rise development, it may not be willing to approve any more loans in the same location.

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.

Case study

A photograph of the author.

Finder's home loans editor switched lenders to avoid a postcode restriction

When I was looking to buy a home, I approached a lender to see how much I could borrow. I had a 20% deposit saved, so I needed a loan with an 80% LVR. The lender was willing to lend me more than I needed. Everything was looking good.

But when I was closer to making an offer on a property, I went back to the lender and indicated the postcode I was hoping to buy in. Suddenly I was in a very different situation. My postcode in an inner-city suburb had a large number of new apartments under construction. If I wanted to buy a unit or a townhouse, the lender would lower my LVR to 70%.

I had nowhere near a 30% deposit, and I was looking at townhouses specifically. The lender wasn't particularly clear on whether all townhouses were subject to the restriction, but it wasn't worth the risk. I contacted a new lender and checked if it had any restrictions in the postcode. It didn't.

Because I had only made enquiries with lenders and not a full application, I didn't get rejected. I didn't even submit an application. But if I had submitted a full application, a rejection would have been a red flag on my credit score. This could have made it harder to apply with a new lender.

Richard Whitten

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.

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.

Tips for buyers

Number 1

Get pre-approval.

Pre-approval gives you an idea of how much a lender will let you borrow. It also gives you the chance to discover postcode restrictions which might affect you if you know which postcode(s) you are looking at.

Number 2

Speak to multiple lenders.

If one lender doesn't want to lend in your desired postcode, other lenders might.

Number 3

Speak to a mortgage broker.

Mortgage brokers generally have a good idea of the market and what restrictions lenders have.

Number 4

Research the property market.

By understanding the market you want to buy in, you'll have a clearer idea of how desirable your area is.

Do the big four banks have postcode restrictions?

Yes, the big four banks will have postcode restrictions. According to Commonwealth Bank's website, it has caps on the loan-to-value ratio its willing to lend depending on the suburb a property is located in. This is to reduce the risk in properties which it doesn't deem to be 'active' and means you may need to save a higher deposit.

Back in 2017, ANZ released a list of postcodes it would restrict lending in.

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