Banks are always looking to reduce risk. Some are willing to gamble more than others, but every lender will opt for the conservative route when possible. Let’s look at the worst case scenario, if something were to go wrong and you are unable to pay back the loan on your apartment, the lender would want to be able to sell the apartment to recoup the losses. With this in mind, lenders prefer to fund the purchase of properties that can be sold quickly .
Lenders will rarely take a punt on properties that they are not able to be protected by mortgage insurers. Mortgage insurers offer lenders mortgage insurance (LMI) to protect the bank if you default on your loan. These insurers generally won’t cover properties under 40 square metres, so the banks have little choice but to follow suit.The exact regulations and restrictions for apartment loans are dependent on each individual lender’s willingness to accept risk. Here are some common conditions for apartment loans.
- Bedroom requirements. Many lenders will require the apartment to have a bedroom that is separate to the living area, which means they will not provide financing for studio apartments.
- Limits to exposure. Some large lenders will also look to limit their exposure to individual developments. For example, once a lender has funded a certain percentage of purchases in a new apartment complex, but once it hits a certain limit they may refuse to offer loans for any more apartments in the same complex.
- Property use. Properties that are managed as part of a hotel or resort, for example, may not qualify for a loan. Some lenders will only finance loans for apartments designed for residential use.
- Size limits. Most lenders impose restrictions on the minimum size of an apartment. As a general rule, 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. If your apartment is smaller than this, finding the funds you need may be difficult.
- Deposit requirements. Lenders will always consider the property value in relation to the loan amount, also known as the loan-to-value ratio (LVR). For small apartments of less than 40 square metres, you most likely won’t be able to borrow more than 80% of the property’s value, which means you’ll need to have a deposit of at least 20% of the purchase price ready to go. The maximum LVR you will usually be able to borrow is 90%.