When buying a property it’s crucial to get a pre-approval on your finance to get certainty on your borrowing capacity and to enable you to move quickly when you find the perfect property.
A pre-approval isn’t always a guarantee. It is an indication of the loan amount only. The distinction is important, because lenders not only take into consideration your personal circumstances but also the attributes of the property you wish to buy when deciding how much to lend.
While lenders may not outright refuse to provide lending for the purchase of a property, they often adjust the loan to value ratio (LVR) for high-risk purchases, requiring you to provide a larger deposit to fund the purchase.
The properties subject to these limitations are commonly referred to as “specialised securities”, and some of these include:
Properties located off the beaten track, such as rural farmhouses or vineyards; typically attract fewer potential buyers than those in residential areas. This has implications for resale, making properties such as this higher risk prospects for lending, resulting in less appealing LVRs, typically in the realm of 60%.
Heritage listed properties more common in Sydney and Melbourne, but are those with overlays, can provide limitations to the highest and best use of a property, which can limit capital growth and potential resale. Some lenders view heritage listed properties as poor security and can be disinclined to provide high LVRs.
Properties with a Company Share structure are subject to restrictive lending criteria, as a company owns the block and each apartment is considered a share. This means unit holders are shareholders in the company, rather than direct owners of a property. Banks are reluctant to lend in these instances, as the ability to foreclose on a share is more complex than other ownership titles like Strata. This can drastically impact the amount a lender will allow you to borrow.
Inner city suburbs with buildings typically higher than four storeys high are considered as high density. Some lenders have decreased their LVR to 70% for these types of dwellings to combat over supply issues.
Apartments under 50m² are another potentially high-risk category, as lenders often have strict minimum size requirements that if not met require a higher deposit. The main risk is resell value.
Before signing a contract of sale, check with your mortgage broker to ensure you meet the required borrowing criteria of the lender.