02 Nov Need a loan for an apartment?
With lots of new apartments on the market and the recent downward trend in prices, buying an apartment can seem an affordable way to get onto the housing ladder. They are however treated differently to a house purchase and there are other considerations to take into account before making that offer.
If you are about to take that step, whether to live in or as an investment, and need a loan to finance your purchase, then you will need to ensure that a lender will accept the property as security. There may be a number of restrictions that could impact your purchase.
Lenders see apartments as a slightly higher risk in comparison to a house. Therefore, they may make certain restrictions to mitigate their risk. A lender doesn’t want to make a bad investment any more than you do.
We all know that size matters, and many lenders do not like small. In the case of small units and specifically studio apartments, many lenders will refuse to take them as security with a fear that if the loan was to go bad, they would struggle to sell.
Some lenders may provide finance for studio apartments but they’ll usually require at least a 20% deposit – that is, you’ll only be able to borrow up to 80% of the property value.
With this in mind if you are looking to purchase a property smaller than 40m2 living space (excluding balconies, storage cages and car parks) you should definitely seek advice.
Location is a major factor; most lenders have a list of suburbs (in some suburbs that will include specific developments) that they’ve identified as high risk. These suburbs generally have a large supply of new developments and high-rise apartments.
In these “high risk” areas the appetite to fund changes form lender to lender with some restricting the loan to value ratio (LVR) meaning that you may have to come up with a larger deposit. Lenders may also restrict the number of units that they are exposed to and will not want a high level of concentration in that development or suburb. Most mortgage brokers should have access to security development registers, so again it makes sense to seek some assistance prior to making an offer.
If you are an investor and looing at multiple purchases in one suburb or development, lenders may also impose a restriction to prevent you being over-exposed.
What’s in a title?
Ascertain what type of title the property has early on. Most apartments have a strata title – which doesn’t many lenders do not have an issue with. However, do look out for:
- Company titles
- Stratum titles
- Tenants in common titles
Many lenders consider these titles high-risk due to the delays that often occur when it comes time to sell. Again, checking out acceptable titles with a lender can prevent a lot of wasted time.
Strata Fees – Another cost that is sometimes overlooked when purchasing an apartment are the strata levies (also known as strata or body corporate fees). These fees are for the upkeep and regular maintenance of the building. If you are purchasing in a building with additional amenities such as a pool or a gymnasium then these costs may increase the strata fees paid.
Purchasing an off-the-plan apartment can also be risky. You need to make sure that what you commit to paying at the outset, isn’t more than the apartment is worth after it’s built.
Many lenders may only lend for off-the-plan for properties that will be completed within three to six months, any longer and they may lower loan to value (LVR), meaning you would need a larger deposit. Another factor is ensuring that your financial position does not change during that period as a loan you have been approved for six months previously you may find that the lender may decline of you your financial situation changes. So, changing jobs, having children could create issues.
Do your homework
As well as taking into account factors such as the location, size and title of the apartment when applying for a loan for an apartment, there are a few other factors to consider.
- Credit score
With the introduction of comprehensive credit reporting (covered in a previous blog) ensure that your credit commitments are up to date, you are not overdrawn and you are not doing too many applications for finance. There are many sites now that you can check your score for free.
- Get help
When choosing a lender, it’s not just about getting the best rates, fees or service. With lenders having different appetites for and niches it makes sense to get some help to ensure that you get approved. An accredited mortgage and finance broker can assist you in making the right choice. Most brokers do not charge a fee, so it’s probably only going to cost you time.
You can contact your Fox Mortgages Broker on 9304 9682 if you’d like more information or assistance.