There are several property types that are considered ‘risky’ by banks, which could result in your home loan application being declined or at best, leave you less options. These options tend to have unavoidable provisions, such as a higher interest rate and restrict loan to value ratio. All of which point to either a bigger deposit or forking out more money.
In general, the banks restrict lending to properties that appeal to a limited resale or tenant market. They are therefore considered risky and should be purchased with caution.
- Serviced apartments – With these properties, an operator is engaged to look after the building and manage the property at expensive ongoing management costs. So you are reliant on them and cannot change companies as the management rights form part of the ownership. They carry a lot more risk than buying an ordinary apartment as you’re relying on the operator to get it right and on the tourism and business markets to remain strong to maintain occupancy. These properties also have a limited resale market (since only investors buy them you’re cutting out up to 70% of potential purchasers) not to mention the limited letting market.
- Defence Housing accommodation (DHA) – while these properties seem attractive and come with the certainty of long leases and generally no ongoing maintenance, they have a limited resale market and substantial management charges. Generally they need to be up for sale to defence housing first and are only located in areas requiring housing for defence personnel, which may not be the most traditional therefore unattractive to most.
- Student Accommodation
Student accommodation is often considered a risky investment by lenders as they are often very small with shared facilities and there would only be a small pool of potential tenants. These apartments are usually located close to universities and surrounded by other student accommodation, so investors will most likely only have students interested and there may also be constant vacancy periods during December/January when university have holidays.
- Small units/ Studio apartments – most banks prefer apartments to comprise at least 50 square metres of living space, not including balconies or car parking. However, with our changing lifestyles some will now lend on properties that are 40 square metres in size. Studio apartments in the inner CBD (average size of 18 – 22 m²) will often attract negative attention of lenders and mortgage insurers. While rental returns can be above average, it’s best to steer clear unless you have a solid deposit.
- Large off the plan developments – There are lots of potential issues with large off the plan developments making banks wary of this type of purchase. Banks worry about a ‘concentration risk’ and therefore restrict how many apartments they will lend on. There is also an increasing supply of these properties every year limiting the best margin returns for banks, unlike the traditional property would.
- Mining towns – These markets tend to be more investor driven with very little owner occupiers. They also rely heavily on both the investor and mining industry therefore when a mine shuts or scales down there most likely will be a collapse in that towns property market. They are best avoided to increase the chances of borrowing with major lenders.
- Rental guaranteed apartments–The cost of the rental guarantee (which is usually inflated to make the return look better than it really is) is added to the purchase price and used by the developer to justify inflated prices. In other words you’re paying the developer up front to guarantee the rent for you. And it’s not uncommon for the rent to drop when the rental guarantee period expires, leaving you with a hole in your budget.
In summary, it’s not good enough for the bank’s money so it shouldn’t be good enough for your hard earned cash. Perhaps take it as a warning sign and consider looking elsewhere.
For an honest and unbiased opinion, talk to Think and Grow Finance today on 03 8390 5855 or email email@example.com