Difficulty in securing bank loans for Australia’s smallest properties means the most affordable options on the property market, such as studio apartments, continue to be out of reach for many homeowners.
Micro living is an increasing trend in many city-centres in Australia, and around the world, which sees homeowners trade in floor size for the many amenities that come with city living. However, getting a home loan for smaller living spaces can prove to be a problem.
Apartment living has been an increasing trend in Australian cities among several demographics in recent years. Although apartments are not a new trend in other large cosmopolitan cities around the world, increasing population in our capital cities has seen a growth surge around the country.
Smaller studio apartments have also risen in popularity, presenting a more affordable alternative to traditional apartments and providing a solution to high-population density in big cities. According to Sourceable, the number of studio apartments increased in Australia by 15% between 2006 and 2001, linked to a rise in number of people living alone and the increased amount of time people spend at work.
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Particularly for first homeowners, the appeal of a studio apartment is that given its reduced internal space it’s generally a cheaper option than a one-bedroom. Unlike a standard apartment which has each room divided, a studio apartment is one single main living space, as well as a bathroom. This means that the bedroom, living spaces and kitchen are all part of that one main living space, and the internal living area of the apartment is therefore significantly smaller than even a one-bedroom. For homeowners, as an added bonus the cost of heating and cooling a single multi-purpose space are less, and space restrictions can discourage additional furniture purchases.
Some State Governments have imposed minimum studio apartment sizes or suggested sizes, particularly in bigger cities such as Sydney and Melbourne where inner-city overpopulation has led to shrinking home sizes. Generally, studio apartments are required to be larger than 35 square metres of internal living space, meaning balconies and parking spaces are excluded, but some studio apartments are as small as 15 square metres.
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Why should you consider a studio apartment?
Studio apartments have proved increasingly popular with young professionals, first homeowners, and downsizers and empty nesters. They offer low upkeep thanks to minimal internal spaces and no gardens, and general maintenance requirements are often taken care of by the building strata. They also offer the appeal of inner-city benefits, including easy access to public transportation, shopping, dining and cultural centres.
These smaller properties also come with smaller price tags, meaning you won’t have to take out a huge loan to get started in the property market. This reduced debt can be an asset to younger homeowners who may not have the income to take on a large debt but are keen to get a foot in the market. For investment purposes smaller apartments have been shown to earn higher rental returns proportionately than apartments with larger spaces.
Studio apartments offer a more affordable alternative to city living for many downsizers and young professionals and can be considered a more affordable option. However, with lenders insisting on stricter lending requirements for smaller properties, buyers should weigh up the pros and cons of different property types to see if a studio is the best option for them.
Why do lenders consider loans for studio apartments risky?
Studio apartments are often considered to be a riskier investment by lenders. This is because the lack of internal walls is often considered less marketable than a one-bedroom apartment that has a wall to separate the bedroom and living spaces, and banks consider these properties to have a more limited resale market.
Despite government regulations imposing minimum size expectations on apartments, many banks have their own rules when it comes to borrowing for a studio apartment and you might need to meet other requirements depending on your lender. Some lenders will not approve a home loan on a space smaller than 50 square metres.
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While requirements vary from lender to lender and make home loan applications more difficult for studio apartment buyers, there are three common policies some lenders abide by:
- Firstly, that the apartment has an internal area of at least 40 square metres.
- Secondly, that the apartment has a total area of more than 50 square metres, taking into account internal space, balconies and car spaces.
- Thirdly, an internal living area of only 18 square metres is consider providing that the loan to value ratio is less than 80%.
However, it’s not just the size of the apartment that can encourage banks to turn down your home loan application. Some require a wall between the bedroom and the rest of the space or require the apartment to have its own laundry facilities, as self-contained properties are preferred.
Given these strict conditions to get loan approval, banks are unlikely to approve a home loan on a studio apartment without a full 20 % deposit. As a riskier investment in the eyes of lenders, they are unlikely to offer more than 80% of the purchase price and borrowers are generally unable to access lenders mortgage insurance. You’ll also be less likely to get loan approval for off-the-plan apartments as the value of the property could change before it’s even been built.
A good rule of thumb is to make sure you have pre-approval before making an offer on a studio, and check with your lender what their policy is on apartment sizing to avoid disappointment during your property search.
What to look for in a studio apartment to make your investment more sustainable
Although looking for an apartment larger than 40 square metres is a safe way to get home loan approval, there are other features to look for during your property search to make sure your investment is sustainable long term and ensure you’ll get a return on your money.
Choose your property location carefully – statistics show that renters and owners of studio apartments compensate for the lack of space inside the home by spending a lot of time out and about. Search for locations with a good local dining scene and green spaces or walking tracks to optimise the marketability of your home.
You should also consider the potential rental returns of a given location. Doing some research into which areas tend to have higher rental prices could see a higher return on your investment down the track.
You could also consider which building amenities are important to you. Additional building amenities like elevators, swimming pools, gyms and saunas, and even a building concierge can increase your strata costs quite dramatically. This additional cost can seem disproportionately large in comparison to the loan repayments on a small space. If these amenities are not important to you, consider looking for a building without.
Studio apartments are often an attractive option to investors, particularly given the high deposit required. If you plan on marketing your studio apartment as a rental property, consider renting it fully furnished. Studio dwellers tend to be transient rather than long-term occupants, and a furnished apartment makes it an easier option for those looking to move on in the near future and can raise the rental yield of the property. A furnished studio apartment also makes for an attractive option for Airbnb properties.
Words by Danielle Austin
If you need help with finding the right loan for your studio apartment, give eChoice a call! Our experienced brokers can help with finding the right loan for you and your situation.