In these days of low interest rates and high property prices, most media attention is directed towards the “unaffordability” of a home and oversupply of new apartments. It seems that the potential property buyer is ill prepared for the kinds of properties that their lender is unlikely to lend against when they go ahead and sign the purchase contract.
You may well hold a pre-approval to a dollar amount from your chosen bank, however it does not mean that any property you purchase will be acceptable security to their credit department.
Paid too much?
A mortgage pre-approval does not guarantee that your purchased property will be valued by the lenders for the same amount that you have purchased it from the vendor. Even purchases made at auctions can at times not be valued for the amount you decide to pay for them in the heat of the moment. However the risk is higher with privately negotiated purchases.
Even if a mortgage pre-approval allows you to spend up to $500,000, that is not a guarantee of approval. If you overpay for a property, and the lender’s valuer does not believe it is worth what you have paid for it, you may need to tip in some additional funds of your own to be able to settle the purchase. Obviously that is not always an option.
Very small apartments
Apartments that are under 50sqm are often unacceptable to home loan providers. This includes student accommodation and studio apartments which can be 12-25sqm only.
Buyers who want to commit to a smaller residence should confirm that their lender is prepared to consider it as security. Alternatively speak to your mortgage broker – they have access to lenders who will work with non-standard properties.
Not all property titles are acceptable to your lender. For example apartments that are on a company share title instead of a strata title are often not acceptable to traditional mortgage providers.
Similarly units in a retirement village may not be acceptable to your mortgage provider.
Some sites are “geologically challenged”. They may be located next to a rubbish tip, contaminated or be located next door to a power station. When a valuer shows up to sight the property, problems may surface.
Some lenders are not prepared to lend on a 5% or 10% deposit in certain rural locations. Similarly if the property you have in mind is a large farm, the lending criteria for it may be different to that of a suburban unit.
Do not assume that you can borrow up to 95% on a property that has no house – land only. The borrowing lvr is generally different for land only that it is for an established property.
Serviced apartments operate like a hotel. They are a commercial operation that is generally under a long lease. If you decide to invest in one of these be aware that a larger deposit may be required and your loan will be of a commercial rather than a residential nature.
Ultimately even property buyers who have already obtained a pre-approval from their chosen lender should still sign a purchase contract “subject to finance”. If buying at an auction, make sure you show your intended property and its title to the lender before committing to a purchase.