Risky property types that are harder to get finance for
It's harder to get a loan for properties lenders consider risky, like commercial purchases, very small properties and off-the-plan units.
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If you can't repay your mortgage for whatever reason, your lender can ultimately sell the property and recover the loan. But if the property is unusual in some way, your lender may decide that it will be too hard to sell. This makes lending to you a riskier proposition.
Your home loan application might get rejected if you're buying an off-the-plan unit, for example, or a house in a small mining town. Or the lender might offer you a loan with a lower loan-to-value ratio (LVR), meaning you need to provide a bigger deposit.
Here are some common risky property types and some tips for strengthening your application.
Buying an off-the-plan unit often means putting money down for a property that doesn't yet exist. If the final product is worth less than what you paid for it, or the market has fallen since you signed the contract, your lender may decide not to finance your property.
Do your research on the property you're buying and the developer's track record, and check your contract closely before you buy. Apply for finance before settlement as early as you can. This gives you time to look at other lenders if your application is rejected.
Properties in small regional towns
Buying a property in a small country town isn't inherently risky. But there is definitely less demand in some small towns and that limits the property's sellability.
The riskiest towns are very small towns and ones reliant on a single industry, such as tourism or mining. If a mine closes or a disaster ruins the local environment, property values in such a town could fall. This exposes your lender to a bigger risk.
Very small properties
Lenders often view studio apartments and tiny cottages as risky properties. Again, this is because there is less market appeal for such small dwellings and they can be harder to sell.
Some lenders will actually evaluate this by postcode. If you're buying a small unit in an area with a large concentration of similar properties, your application might get rejected. Some lenders may accept your application but require a 30% deposit rather than the traditional 20%.
The viability of a commercial property depends on the success of the tenant's business as well as the property itself. It's a more complex lending arrangement and requires more diligence on the lender's behalf.
If the property has long-term tenants with successful businesses, you're in a better position, but you will need to be able to demonstrate this in the application. The location and quality of the property itself also matter, of course.
It's harder to obtain finance for highly specific types of investment properties, such as serviced apartments and student accommodation units. These types of properties come with businesses attached and pre-existing arrangements with property management companies.
Such investments can be lucrative ones, but with greater complexity and a much smaller pool of potential buyers, they can be harder to obtain finance for.
Properties with unique conditions
Properties with specific restrictions and unique details can be tricky to finance. Heritage-listed houses offer less room to renovate and are less appealing to many home buyers (although they can be very attractive to the right buyer).
Apartments on a company title can be another difficult case. Here, the entire apartment is owned by a company listed on the title. As a buyer, you essentially become a shareholder of the company with the right to occupy a unit and access shared facilities.
Some company title agreements can be very restrictive. It's even possible that the other shareholders could vote you out of the company and thus lose your unit. Lenders are understandably more cautious about company title units.
Tips for applying for a mortgage on a higher-risk property
If you are hoping to buy any property like the ones mentioned above, don't despair. When trying to get a mortgage for any of riskier property type there are a few steps you can take to improve your chances significantly.
- Get all your paperwork together. Having a strong application is very important. Make sure you have all the necessary documents in advance. If applying for a commercial property, make sure you provide the tenant's lease paperwork, for example.
- Loan-to-value ratio. In many of the cases outlined above, a lender might accept your application if you have a 30% deposit instead of a 20% deposit. It might be hard, but saving a bigger deposit could make the difference.
- Approach a different lender. Every lender has its own lending criteria. If you can't get approved for a mortgage with your first choice of lender, approach another. The only problem here is that applying for loans with multiple lenders is bad for your credit history. That's why you should ask a prospective lender as many questions as you can before applying.
- Talk to a mortgage broker. A qualified mortgage broker can help you find a loan that suits you and help you apply, reducing your chance of rejection.