What makes a home loan application high risk?
The property type, location and your financial position all affect how risky your application becomes.
When considering your application for a home loan, a lender will look at the property to be held as security and take into consideration the resale potential of the property. Although this may not be mentioned when discussing your application, the lender will consider how difficult it would be to sell your property if you default on your loan and the lender were to take possession.
This is considered property risk rather than borrower risk, which can cause additional tightening of lending criteria, or even out-and-out denial of a loan. Both the property type and its location come into consideration when reviewing property risk.
There are a range of property types that would make a lender second guess whether lending to you would be a good investment for them. There are, however, some lenders that are less restrictive than others, which is why it always pays to shop around.
Here are some of the property types that lenders might consider too risky.
A property smaller than 50m2 causes most lenders to be concerned about the property’s resale potential. With such little room, there isn’t much room to make value add changes to the property. A smaller property can also limit the pool of potential buyers.
High rise and high density apartments
Lenders can be concerned when there is a large volume of the same property type in a small geographical area. Most high density areas rely on high-rise apartments to help fulfil the housing needs, which lenders also consider risky due to the lower return on investment. If an oversupply of properties occurs, the lender could face difficulty offloading the property.
There are a few things that could give a lender pause when it comes to lending for off-the-plan apartments. They are often part of a high-density development. Lenders may also be concerned about whether the developers themselves will be able to find the funds needed to complete the build in full, and therefore may not be so open to lending for an off-the-plan purchase.
This doesn’t mean you should dismiss the purchase of an off-the-plan property. It just means you need to be more cautious when doing your research.
Serviced apartments are let out over a shorter period than a standard lease and therefore have a high turnover. A management company is usually contracted to organise tenants, and the company will often require fixed term contracts with the property.
These additional arrangements also mean you are limited by how you can use the property, and you are reliant on another company to make sure it is maintained and you are able to get a good return on investment. All this adds up to more risk when it comes to the lender's assessment of the property. Also, as the property can only be used as an investment this limits buyers the lender can resell the property to.
Similar to serviced apartments, student housing has restrictions on how it can be utilised, and is often very small apartments with shared facilities which makes for a difficult task in resale. Add to this the generally low occupancy rates over the summer period of January and December, which is university holidays, and it makes for what a lender may see as a bad or risky investment. If you are looking at this type of property as an investment, it would be best to make sure you have a high deposit to lower the risk for the lender.
There are quite a few positives to owning defence housing as an investor with guaranteed long leases and generally no ongoing maintenance. However, the fact they are only available to defence personnel and are located in areas that are only defence housing makes for an undesirable risk to the lender. If you opt to use this type of property as part of your portfolio, it would be best to lower the risk to the lender by having a larger deposit.
Transportable or relocated properties
Transportable properties are similar to prefabricated or kit homes in that the components of the house are prefabricated and then assembled onsite. Relocated homes, however, are properties that can be literally picked up from one site and placed at another.
Both transportable and relocated properties can be financed; however, similar to a rural property, there will be additional conditions attached. Transportable homes can be financed similar to a standard construction loan where you are able to draw down on the funds during different stages of construction. Some lenders may not allow this and may only allow funds to be released once the construction is complete and a certificate of occupancy has been issued by council.
For a relocated home, finance is usually available. However, it is usually withheld until the property has been installed fully at the new location and a certificate of occupancy is issued by council. The lender may also require an on-completion inspection and report from a qualified valuer to confirm that it has been installed correctly and meets the lender's security criteria.
With a shop or office attached
A property with a shop or office attached would most likely be considered a dual use property to a lender and, as there is an income-producing aspect, they would not allow for standard home loan funding for the purchase. The lender may consider the whole property commercial and therefore attach additional lending criteria, as well as different interest rates.
Company or other unique title properties
Although the most common title type is strata title, especially with apartments, there are still a few other options out there. One that can cause concern to a lender is company title, where the property is owned by a company and the purchaser owns shares. A property with a company title is a higher-risk investment for a lender as it may take longer to sell, as the company involved may have right of first refusal on the property before it goes to market.
Lenders may also consider stratum and tenants in common titles riskier, as they too could cause delays with resale.
Heritage listed properties
Similarly to company titles, a lender would be concerned about the resale potential of a heritage listed property. Heritage listed properties carry restrictions around what changes can be made to the property, which could affect resale value as well as lower the pool of potential buyers.
Many lenders have a disclosed or undisclosed list of postcodes they see as unfavourable. It is best to make sure you can get a loan before looking in an area.Below are few different areas considerations a lender may take into account when reviewing a home loan.
High risk postcodes
Lenders often create lists of high-risk postcodes.
Media outlets reported in late 2015 NAB had listed multiple postcodes they saw as high-risk. This was followed in May 2016 by the leaking of a similar list from Macquarie Bank. This means lenders will take into account the suburb in which your property is located when assessing whether they will offer you a home loan.
Many of the suburbs on the leaked lists were inner-city suburbs, mining towns, rural areas and islands. This doesn’t mean a lender won’t lend for properties in these areas, but they may implement tighter lending criteria.
Mining towns are heavily dependent on the mining industry and the mine itself sustaining the town's economy. Any downturn in the mining industry would cause a large supply of property to flood the market with little to no demand.
Due to the greater risk of damage and possible destruction of the property, certain flood-prone areas are considered riskier by lenders. Areas that are rated as 1 in 100 year flood zones would not cause too much concern from a lender, but areas that have a higher risk of floods may cause a lender concern.
Although flood-prone areas are higher risk, most lenders would consider lending for properties in these areas, but with additional conditions such as requiring the borrower to have flood insurance or a higher deposit.
Lenders would consider a home loan for a property in a high crime area a higher risk than other areas due to the increased risk of damage or loss. Additional to damage to the property itself, a high-crime area is less attractive to potential buyers.
Areas of high unemployment would be considered riskier due to the increased chance of a borrower defaulting on their loan. Also, as the area has a high percentage of unemployment, there is less chance the lender would be able to resell the property if the borrower did default and it needed to take ownership. The area would be less attractive to potential purchasers due to the overall economic concerns.
If you are looking at a property outside a main city or town there are a few extra considerations that a bank will look at before offering to lend you funds. You will need to make sure that there is water, either from mains or a reliable tank water system, that power is connected and that the property is not income-producing property, like a commercial farm.
Lenders are also concerned about rural properties as they are located in areas that have a smaller pool of potential buyers. A lender would see it as even riskier if the property was an investment property, as the rental pool would also be reduced. There are lenders that are happy to lend for rural properties, so if you are looking at rural properties, shop around and you may find a lender that will suit.
There are often ways you can still get a home loan if you are considering purchasing a property deemed high risk. Shop around amongst lenders, save a bigger deposit or have a greater amount of savings to show the lender you are less of a risk.
Also consider using a mortgage broker. Mortgage brokers deal with lenders every day, so they know their lending policies and can suggest which lender to apply with to maximise the success of your application. Compare brokers and contact one below by clicking "Enquire Now".
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