When buying a property it’s important to obtain finance pre-approval – firstly to know your budgetary constraints, but also to enable you to move quickly when you find the perfect property.
But, pre-approval isn’t a guarantee. Instead, it’s an indication of the amount a lender is prepared to fund in ideal circumstances. 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 higher deposit to fund the purchase. The properties subject to these limitations are commonly referred to as “specialised securities”, and it pays to be aware of those to which the limitations apply prior to signing a contract. Accordingly, here’s a short- list of the property types commonly considered to be specialised securities.
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 or 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.
Pensioner’s units and retirement villages
While Australia’s aging population makes this a growing market segment, developers often reap the benefit of capital gain, not the property owner, with implications for a property’s performance and the lender’s loan security.
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. While you may be able to fund a higher deposit, the next buyer may not, which can impact potential resale value down the track.
Before signing a contract of sale, check with your lender to ensure you meet the required borrowing criteria to protect your investment today and in the future.
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