Applying for a home loan for an apartment

Is it harder to get a home loan for an apartment?

An apartment or unit can be a more affordable alternative to a house for some home buyers and investors. Apartments can also appeal to anyone looking for a lower-maintenance property within walking distance from amenities like public transport, cafes and shops.

If you’re thinking about buying an apartment to live in or to rent out, chances are you’ll need a loan to finance your purchase. You may have heard it’s harder to secure a loan for an apartment or unit than for a house, but is this accurate?

From a lender’s perspective, it’s all about mitigating risk; a lender doesn’t want to make a bad investment any more than you do. Lenders may have some additional conditions specifically for apartments to consider when assessing your loan application, as well as the usual criteria like your credit history and whether you can afford the loan.

How do lenders assess apartment loans?

Some of the criteria that lenders typically consider when assessing loan applications for apartments or units include:

The apartment’s location

Most lenders have a list of suburbs—and in some cases, specific developments—that they’ve identified as high risk. These suburbs generally have a large supply of new developments and high-rise apartments.

If you have your heart set on a property in one of a lender’s “blackspot suburbs”, you may be penalised in the form of a lower loan-to-value ratio. This may mean you will need to come up with a bigger deposit for your mortgage application to be approved.

Melissa Christy, former Lending Product Lead at neobank 86 400 and current Head of Lending Operations and Client Assist at AMP Bank, said that lenders blackspot areas to avoid having all their eggs in one basket:

“In general, lenders want to avoid concentrated risk from having multiple properties in one building, or too many properties in one postcode,” she said.

For bigger investors, she added that “most lenders will restrict you buying more than three or four units in a single block”.

Lenders typically won’t reveal their lists of blackspot suburbs, but reaching out to your local real estate agent, buyer’s advocate or mortgage broker may help you identify potential problem areas based on their experience and expertise.

The apartment’s size

Lenders won’t always approve a mortgage application for any type of property. For example, some lenders won’t finance studio apartments out of concern that if you default on the loan, the resale value may not be enough to cover their costs. They typically tend to favour lending for larger apartments with a separate bedroom, which they think will likely be more in-demand if the property needs to be sold.

Lenders that do provide finance for studio apartments may require at least a 20% deposit, meaning you’ll only be able to borrow up to 80% of the property value.

Lenders may also have minimum size limits as part of their mortgage eligibility criteria. For example, you may be hard-pressed to find a lender for an apartment of under 40 square metres of living space (excluding balconies, storage cages and car parks).

While 40 sqm is widely cited as the minimum floor space required, Damien Roylance, Director of Entourage Finance, recommends aiming higher.

“I’d say you really need to be purchasing a property with a minimum floor space of 50 sqm to ensure you can get a foot in the door with the majority of lenders.”

Buying in more established areas, and in medium-density developments will also typically make for a more attractive prospect for lenders.

“We find the older apartments – from the Art Deco influence of the 1930s through to the 1970s and 80s – have great appeal due to the more generous floorplan, which has greater capacity to have value added to them,” said Mr Roylance.

The property’s title

It’s important to find out what type of title a property has early on. Most apartments have a strata title, which doesn’t tend to pose a problem with lenders.

On the other hand, look out for:

• Company titles, where you own a share in the company that owns the title
• Stratum titles, where you hold the strata title for your portion of the property, and are a part-owner in the company that owns any shared land
• Tenants in common titles, which are similar to company titles in that each owner holds a share of the apartment building.

These alternative titles are more likely to be found in some older apartment blocks. Lenders may consider these titles high-risk due to the delays that can occur when it comes time to sell, though it may not always be a deal breaker. It may be worth checking with a mortgage broker to find out which lenders are more likely to offer a mortgage on one of these properties.

Off-the-plan apartments

Purchasing an off-the-plan apartment requires careful planning and is not without its risks. 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.

To mitigate this risk, some lenders only lend for off-the-plan properties to be completed within three months. You may also need to ensure that your financial situation is still the same or better than it was when you first sought approval.

According to Mr Roylance, it’s a good idea to consolidate debts, clean up your expenses, and take care of anything else that will help you meet the lender’s criteria. “We start to get clients ready for off-the-plan settlements three to six months out. In the case of an off-the-plan purchase, it’s important to make sure the client is financially fit for unconditional approval: a lot can happen in 12-24 months, when they originally put down their deposit,” said Mr Roylance.

Tips for applying for an apartment loan

As well as considering factors like an apartment’s location, size and title when applying for a home loan, there are a few other steps that may help to boost your chances.

Don’t submit too many applications

Each time you apply for finance, whether the application is successful or not, it is recorded against your credit history. When you’re researching lenders, you can protect your credit rating by avoiding that “apply now” button until you’re certain you want to commit to this lender.

Show that you manage money well

It’s always worth making sure your finances are in good order before applying for a home loan on any type of property, including apartments.

For example, before you apply for a home loan, you can try to reduce your household expenses, pick up extra income, and get ahead on any other debts you currently owe. This can help demonstrate that you can afford the mortgage without going into undue financial stress or having to heavily rely on credit to get by.

Be honest

When you’re preparing the paperwork for your home loan application, honesty is the best policy. Avoid misleading the lender or concealing information about your finances, such as outstanding loans or credit cards, or past defaults or bankruptcy, as the lender will still discover these details when it makes a credit check.

If you’re concerned that issues in your personal finances could affect your mortgage application, being upfront with the lender and taking steps to demonstrate the strength of your application in other areas may help to raise your approval chances.

Consider getting help from an expert

When choosing a lender, it’s not just about getting the best rates, fees or service. You also need to consider whether you have a good shot at being approved. Each lender uses their own set of criteria to assess risk, but these rules aren’t typically disclosed to the public.

Industry experts such as mortgage brokers may be more familiar with this eligibility criteria, and can help you find a lender that may best suit your particular situation.

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