Loans for the purchase of residential apartments usually have guidelines and/or restrictions based on each lender’s willingness to accept the risk associated with the property. The main consideration is usually the size of the apartment.
Most lenders impose restrictions on the minimum size of an apartment. Usually 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.
Lenders have a preference to take properties as security which can be sold quickly if needed. In general, smaller apartments are considered harder to sell than larger ones.
It is believed by the lenders that the smaller the property the fewer potential buyers there will be who will be interested in purchasing it. Especially if there is ample choice in the market.
Many lenders will require the apartment to have at least one bedroom that is separate to the living area.
A studio apartment is one which doesn’t have a wall between the bedroom and the living area. The layout of these apartments with, the usually very small size make them particularly difficult to sell quickly and therefore not acceptable as security to many lenders.
Some lenders may refuse to finance apartments in buildings with communal laundries (such as student accommodation).
Lenders will always consider the property value in relation to the loan amount, known as the loan-to-value ratio (LVR). For small apartments of less than 40 square metres it is most likely the loan will be limited to no more than 80% of the property’s value. This means a deposit of at least 20% of the purchase price is required. The maximum LVR on larger apartments will usually be 90%.
It is standard for loans above 80% LVR to require Lenders Mortgage Insurance (LMI) to protect the lender should the borrower default on the loan. These insurers generally won’t cover properties under 40 square metres, so therefore the lender must adopt the same policy and not accept those properties too.
Properties that are managed as part of a hotel or resort may not be acceptable.
Some type of loans ie: Low Doc, have a higher risk to the lender and therefore they may also not want the additional risk or a small or studio apartment as well.
Lenders are always looking to minimise risk. Some are more conservative than others, but every lender will look to avoid risk as much as possible.
Some advantages with small apartments are that they are cheaper plus can be close to the city, work, transport and lifestyle options. They can also as a result have a high rental income. Disadvantages with small apartments can include a lower amount that you can borrow and that although there is high rental yield they don’t always provide good opportunities for capital growth.
These are usually managed, with restrictions on who can buy and even who can sell the property ie: the selling agent. As a result the security would be unacceptable to most lenders