When you buy property, you aim to purchase a sound investment in terms of structure and profitability. Buying this type of dwelling allows you to make a return on your investment over time. A lender typically thinks the same way. They want you to repay your loan, plus interest, with minimal risk. However, some property types are a safer purchase than others. Therefore, lenders review the type of dwelling you are buying, before they approve your loan. Some properties will make the grade; others will not.
So how do you know what types of property to avoid?
There are specific types of property that a bank will try to avoid financing. The main reason lenders avoid these homes is due to greater financial risk. Here are eight frequently avoided property types, so you get an idea of what to buy and what not to buy.
Blacklisted Properties to Avoid
Apartments Under 40 Squares
Small apartments of less than 40 square metres are too small. Banks steer clear of these dwellings as they are harder to rent, with higher vacancy rates. Most lenders will have a minimum property size requirement. Nevertheless, if you have a sizeable portfolio, then you may be able to buy smaller property.
A company typically runs serviced apartments, and this can represent problems for a lender. Businesses can go bankrupt, change hands or have many people managing the organisation. These types of structures pose a greater risk for a lender.
Changes to government regulations can reduce the number of international students allowed into the country. Such changes can then hurt the profitability of an apartment. Therefore, these types of investments can be riskier than others with tenant turnover being higher than other investment types.
Dwellings in an Unsafe Location
Areas that have high crime rates and higher levels of unemployment can be red flags for lenders. All lenders have a list of postcodes they try to avoid due to increased risk of property damage. Hence, the most common areas are in mining towns and dangerous inner-city areas.
Mass Produced Apartments
There are thousands of apartments under construction in Sydney, Melbourne and Brisbane at present. Many of these are the same and will flood the market. Lenders like apartments with a point of difference and prefer smaller boutique developments.
Dwellings with an Unusual Title
Several titles make a property harder to sell therefore a bank will try to avoid these. As such, these titles include a stratum title, company share titles, and tenants in common titles. Instead of purchasing an investment with one of these titles, look to buy strata, community or torrens titled property.
Structurally Unsound Dwellings
Most lenders will have your property valued before approving your loan. Thus, this requirement ensures that the property is in sound condition. Should the property have structural issues, then a builders report must verify that the structure is sound. Although, if the building does not pass inspection or comply with building code, then your application will be declined.
Dwellings with Geographical Problems
Homes that are situated in flood zones or near the coast can represent an issue for a lender. Other considerations are homes within fire areas or located next to dams, rivers and creeks.
While all lenders evaluate loan applications on their own merits, they still have guidelines to meet. Failing to fulfil these, can result in the declining of your application.
Written by eChoice
Since 1998, eChoice has helped more than 50,000 Australians secure a home loan through its network of over 25 lenders and hundreds of loans. Best of all our service is cost and obligation free!