Does the bank care what type of property you buy?

19 April 2017

House or unit? Fixer upper or newly-constructed? Do different property types influence a lender’s decision to grant you a home loan

It’s the Australian dream: buying your own house on a big block of land in the leafy suburbs. Of course, rising property prices mean that fewer Aussies can now afford such a life, but there are still many of us buying townhouses, apartments, and investment properties.

This continued change in Aussie property tastes raises a question: Is it more difficult to get a mortgage for one type of property or another?

Do different property types influence a lender’s decision?

No, lenders consider a range of factors when approving or rejecting home loan applications. But when it comes to the actual type of building that you’re buying (e.g. house, apartment, duplex), lenders generally don’t discriminate too much. Residential home loans can be used to purchase houses, townhouses, apartments, units, duplexes, investment properties, vacant land, and the construction of a home (see Construction Loans).

It’s obvious that standalone houses tend to be worth more than smaller residences such as units and apartments, because the land the house sits on will continue to appreciate. But “location, location, location” is still true today, so a small, new apartment close to the city could be considered equally worthy as security for a home loan as a big, old home in the suburbs if they have the same resale value.

Of course, the goal of a bank is to make money via interest off a mortgage loan, and to minimise the risk they undertake by lending you money. This means that lenders are selective about which customers they will lend to, based on factors including the particular property you are buying.

Lenders tend to approve or reject home loan applications based on a number of factors similar to the ones you yourself consider when buying a home. Some of the things both you and the lender will consider about a property are:

  • The value of the property being purchased. This determines how large a security the bank will have against the loan they are providing you – the more valuable the property and the higher the likely resale value, the more willing a lender will be to give you a loan. This includes a whole range of factors such as location, size, age and condition, number of rooms and car spaces, facilities like a pool, and more. We’ve explained how banks change your interest rate based on your loan-to-value ratio (LVR) here.
  • The location of the property being purchased. Location is everything, and a property that is close to shops and public transport or a major motorway is likely to increase in resale value over time. This means there is less risk that you will not be able to repay your loan, so the bank will be happier to lend you the money to buy that property.
  • Whether the property is commercial or residential. Banks need to consider the risks of financing large properties for commercial buyers, and also the risks of financing certain companies. The risk is generally higher for commercial properties than for residential, meaning residential properties are generally easier to finance – good news for home buyers. As for commercial purchases, a company with a high risk business strategy buying a large plot of land will be less attractive than a bigger, blue-chip company making a smaller purchase. Companies should not despair – they can always invest in a mortgage broker, who can easily find a loan for them.
  • Using a property for investment or residential purposes. An investment property may be the same type of property as one you’d live in, but the circumstances are quite different. Investment properties provide a steady stream of rental income, and are often deliberately purchased in high-growth areas. Both of these factors make them more attractive to mortgage lenders, as they create a more secure investment. However, investors do pay higher interest rates on their home loans.

We’ve written more here about the value proposition involved in the different types of housing available in Australia:

Find out which home loans on the market offer outstanding value to home buyers, by checking out Canstar’s star ratings.

If you’re currently considering a home loan, the comparison table below displays some of the variable rate home loans on our database with links to lenders’ websites that are available for first home buyers. This table is sorted by Star Rating (highest to lowest), followed by comparison rate (lowest-highest). Products shown are principal and interest home loans available for a loan amount of $350K in NSW with an LVR of 80% of the property value.

Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products.

*Comparison rate based on loan amount of $150,000 and a term of 25 years. Read the Comparison Rate Warning


Learn more about Home Loans

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