The type of property you want to buy can directly affect whether a lender approves or denies your loan application, so find out what their red flags are.
When a lender is assessing the property type being proposed as security against a home loan, they are analysing it from a marketability and saleability viewpoint. The more attractive a property is to the market and the higher the demand for it is, the happier they will be to finance this property.
Read on to find out the factors evaluated by most lenders to determine whether a certain property is suitable for finance or not.
Loan to value ratio (LVR)
LVR refers to the loan amount you wish to borrow as a percentage of the purchase price of a property. If you have a deposit of $50,000 and wish to buy a property worth $500,000 your LVR is 90%.
The higher your proposed LVR, the greater the risk and the more money the lender will have to recover if you default on the property loan. Therefore, if the property type you are trying to finance isn’t a standard property development, you can expect the acceptable LVR to be lower than the 80% accepted by most lenders.
Commercial properties are a magnet for lower LVRs because they are seen as a high risk purchase. This is because unlike a residential property, a commercial property’s sale value is directly linked to its tenant status. If you’re buying a commercial property most lenders will set a maximum LVR of 70%.
Even if you’re able to borrow over 80%, lenders will usually make it a condition that you also take out lenders mortgage insurance (LMI). LMI won’t cover you in any way, but compensates your lender if you default on your mortgage and they lose out when they sell your property. LMI comes with a fee which the borrower must pay, and varies depending on the size of your loan and deposit, as well as other factors.
When you seek a loan from a lender they’ll value the security being offered up for the loan. In the majority of purchases this will be the property you’re purchasing. The valuation doesn’t determine the market price of the property, but rather what the bank can hope to recoup if they need to sell it in future.
Valuation includes factors such as:
- Location. The proximity of your property to schools, restaurants, transport and other features likely to add value.
- Building structure, condition and faults. The valuer will measure the property and note how many rooms it has, along with checking for issues which may lower its value such as structural damage.
- Presentation and facilities. The overall appearance of the property will be valued, including the fixtures and fittings. Any facilities the property has including pools or gyms are also favourably looked at.
- Access. This includes how many car spaces or garage spaces the property has.
- Planning restrictions and zoning. A valuer also takes into account what a property’s highest potential use is, so this will be determined in relation to any restrictions and zoning issues specific to the area.
Any property type with an unusual certificate of title, such as company title units, presents a higher level of risk to the bank. A higher exposure to risk for the lender translates into stricter lending conditions for the borrower.
What you need to know on property titles
Company titled units. With Company Titled units the company owns the whole building. You as the owner only have the right to occupy the building via a share certificate, as opposed to a title where you own airspace.
There is also a risk the other company shareholders could vote you out of the company, therefore you lose your right to occupy and the shares are allocated to someone else.
Company Titled units also generally interview incoming tenants and they decide if they are suitable to rent your apartment. There's really a potential loss of control of the asset and this is the reason why banks generally limit their exposure to risk on company title.
Tenants in common apartment blocks. All owners are listed as co-owners of the total property via a schedule attached to one title - there are no individual titles. These are rare and most have been converted to strata title, creating 'common property' - all owners are a co-owner of the common areas plus their own individual title to their apartments.
Old System title. This is where new ownership is written on the back of a very old title document. The title is not guaranteed by the state. Although these are becoming very rare they're quite common around the Balmain and Glebe areas of Sydney.
Limited title and qualified title. Limited title means the boundaries of the property cannot be guaranteed and have not been investigated by Land and Property Information.
Qualified title is a conversion from Old System to Torrens Title. It bears a notation on the title that stays on the title until 12 years have passed, to allow any claims on the land to take place.
Superannuation trust funds. Companies linked to trust funds for superannuation also come under the microscope, as well as what is contained in the documents for self-managed super funds.
What types of properties can be financed?
There are a wide range of properties that can be financed. However, the secret is matching the right property type to the right lender, which is why the advice of a professional mortgage broker can be invaluable. Whether you want to purchase a warehouse conversion, a heritage listed property, an inner city unit or vacant land, you will generally be able to find a lender willing to help you finance any type of property development.
Owner-occupier home loans come with conditions which differ from an investment property, such as higher available LVRs.
Loans for investment properties generally have the same characteristics as owner-occupier home loan, although they may have lower LVRs.
Vacant land and construction
Many lenders offer loans which can be used to purchase land and/or construct a property, whether it’s to sell off later as an investment or to enjoy as a home. These loans allow you to drawdown funds as your builder requires them, so you only pay interest on the amounts you’ve used. Some of these loans will come with extra restrictions which may include lower maximum LVRs or increased fees.
Commercial properties include a large number of different property types, such as warehouses, factories, retail spaces, hotels, offices, parking spaces, farming land and medical properties.
Buying a commercial property to conduct your business from or to rent out as an investment has its own set of separate conditions. As mentioned above this can include a low LVR, because they’re higher risk than regular residential loans. They may also have shorter maximum terms, higher minimum redraws and higher interest rates compared to residential loans.
Some lenders will also limit what types of commercial property they’ll finance, which means finding finance could prove difficult, or may require a professional mortgage broker.