Buying an apartment is often much more affordable and practical than buying a house, particularly for first home buyers. But it's important to know that this is one of the times where size really does matter.
While getting a home loan for an apartment can be a seamless process and no different to buying a house, there can be restrictions on apartments that you should be aware of.
Why are there restrictions on getting a loan for an apartment?
Lenders can be more cautious when approving home loans for apartments. This is because the lender uses your property as security for your loan.
So, if you are unable to repay your loan, the lender can force the sale of your property to recover your debt.
However, apartments can be harder to sell than houses, especially very small apartments or studio apartments, which is why the lender may not choose to take the risk.
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.
Expert insight
"You need to ask yourself, 'Is this a good investment if the bank won't lend me money for it?' Generally, it's the land that appreciates in value, and when you're looking at an apartment with less than 50 sqm of building space on the 6th floor, it often comes with minimal land value. In real estate, size is crucial, particularly for achieving long-term growth and building equity."
John Pidgeon
Director and Head Property Coach of Solvere, Director of Envisage Property
Reasons for rejection
Every lender will have their own restrictions about apartment lending. But here are the most common reasons they reject apartment loan applications:
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.
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 will require a bigger deposit.
Postcode restrictions
There are a number of reasons that certain postcodes may be restricted by lenders. It could be that the area has too many apartments, that it's too rural or it's in something like a mining town.
If you apply to buy in a restricted postcode, your lender might reject your application, ask for a bigger deposit or limit the amount you can borrow.
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.
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.
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.
So, how can I get a home loan for an apartment?
If you're worried about applying for a loan for an apartment, there are a few things you can do.
1. Work out your borrowing power.
Understand what size apartment you will be looking at by working out your borrowing power.
2. 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.
3. Speak to lenders.
If you know the rough size of the apartments you're looking at and the area you're looking in, check with different lenders about potential apartment restrictions. Do this before you submit any applications, as multiple credit applications can reflect poorly on your credit score.
4. 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.
5. Get pre-approval.
Once you know which lenders are willing to lend for apartments, you can apply for pre-approval. By getting pre-approval from a lender you know how much it is willing to lend to you. This gives you a much clearer idea of what apartments you should be looking at.
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.
Frequently asked questions about home loans for apartments
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.
It can be harder to get a home loan for an apartment if the apartment is particularly small or if it is in an area with high apartment density. But typically getting finance for an apartment shouldn't be much harder than a house. Home loans for houses can also face obstacles, for example if you want to buy in a restricted postcode.
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To make sure you get accurate and helpful information, this guide has been reviewed by John Pidgeon, a member of Finder's Editorial Review Board.
Richard Whitten is Finder’s Senior Money Editor, with over eight years of experience in home loans, property, credit cards and personal finance. His insights appear in top media outlets like Yahoo Finance, Money Magazine, and the Herald Sun, and he frequently offers expert commentary on television and radio, helping Australians navigate mortgages and property ownership. Richard started his career in education and textbook publishing in South Korea. He holds multiple industry certifications, including a Certificate IV in Mortgage Broking (RG 206) and Tier 1 and Tier 2 certifications (RG 146), as well as a Bachelor of Education from the University of Sydney and a Graduate Certificate in Communications from Deakin University. See full bio
Richard's expertise
Richard has written 674 Finder guides across topics including:
Are there any lenders that now finance properties under 40sqm?
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.
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Are there any lenders that now finance properties under 40sqm?
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