Borrowing For Units and Apartments

Lending For Small Apartments and holiday units

 

Have you ever wondered every now and then, - “Should I purchase that unit or that studio apartment?”

Units and studio apartments are usually promoted with very positive looking rental returns and yields however that’s usually(but not always) where above average returns end.

 

This is some of the “rumors” you may of heard about them-: “The banks won’t let out money against small metropolitan studio apartments, You won’t get lending if the floor size is less than fifty square meters, University or student apartments are a no go, Some lenders won’t let you borrow money for units in large complexes, Hotel or motel conversions are no good, The location of the apartment within the block of units is important

 

Most of the time this is just “noise” some of these points are very true. Where there is smoke there is usually fire.

The recent global credit crisis has put a stop on a lot of borrowing overall and small units have not been protected from this

The most common stopping point is usually lender’s mortgage insurance (LMI).

They are the ones imposing all the restrictions that are passed onto the bank.

If you require Lenders mortgage insurance this is where the hard work starts

 

Points to overcome:

 Size: This may not be as important to the borrower, you would expect the LMI insurer to have minimum requirements on the minimum metered floor space of the unit. You should try to avoid any units with a square floor space of less than fifty square meters. It must be fifty square meters of proper ‘living space’ (not verandas and car parks etc). In some cases this may be increased down to forty square meters however the apartment would need to be in a “very good capital city location”. The Lender could not always require a floor-space requirement but mentions that Lenders mortgage insurance might be declined the loan for that reason.

 

Location in the development / complex. One important factor may be whether it’s in a good location in the development or if it’s at the dark shaded noisy rear corner of the complex.

 

Title. Strata/stratum title is usually ok, as are many ‘group unit’ mortgage titles.  Lenders mortgage insurers are not commonly concerned with business titles and will allow you lend, though they might lower the lending on your application.

 

Swapping from industrial or commercial to normal residential. Hotel apartments, holiday units and vacation apartments (commercial) lettings other than residential units fall under completely different lending specifications (it could be even commercial). When they are being adapted the one of these you might not get lending until the conversion is finished with the provision it meets all council’s requirements and the banks standard requirements, most banks will go ahead however there may be a reduced loan amount or restrictions on Lenders mortgage insurance. The banks decision with all of the requirements are that you are depending on the management company performing to a high standard and looking after the apartments.

 

 The amount of units or holiday apartments in a new complex: There might be a cap on the amount of apartments within the one development that you can put up for mortgage insurance.

The bank may cap your borrowing on 6 units in any one new complex or even not allow lending for more than 25 per cent of a new development

Here are some more requirements you may need for getting that loan:

-More thorough valuation inspections and reports.

-A call for additional or cross-collateral security.

-A lower Lending to value ratio (seventy to eighty per cent maximum, although some, usually nonconforming banks, only go to sixty per cent) –and higher deposit required.

-Reduced maximum mortgage amount.

-Reduced consideration of the rental income to allow for longer vacancies.

-A call for additional or cross-collateral security.

-The lenders mortgage insurance will be more pricey if even if offered .

-An actual full rejection of application if it all goes wrong!

 

The basic principals of property investing still are the priorities, not always the mention that there’s a small unit or apartment. There are a lot of small holiday units and apartments that have more than doubled or tripled their value in the last ten years. The apartment might have very good yields, low rental misplacement's and be in a prime inner city location so some time and effort in the loan and research during could be worth it!

 

Have a lending question?  Contact Us Here and let us help you.