How To Get Apartment Financing
There is the old question that comes up every now and then, -
“Should I buy that studio apartment?”
They are usually marketed with a very attractive rental return however that's sometimes where the good news ends. The apartment financing can be difficult as its different to a standard home loan.
Here is some of the “noise” that surrounds them-: “They won’t lend against small inner-city studio apartments, You won’t get approval if the floor size is less than 50 sqm, Student apartments are not an option, Some lenders won’t lend for apartments in large complexes, Hotel or motel conversions are no good, The location of the unit within the complex is important
While being just “noise” some of these points are somewhat valid.
The recent credit crisis has put the brakes on a lot of lending overall and small apartments have not been shielded from this.
The biggest hurdle is usually lender’s mortgage insurance (LMI).
They are the ones imposing all the restrictions that are passed onto the bank.
If you require LMI this is where the hard work starts
Title: Strata/stratum title is normally acceptable, as are ‘group’ titles. Mortgage insurers aren’t usually afraid of company title and will lend, though they may lower their LVR.
Size: While this might not be important to the lender, you can expect the mortgage insurer to have minimum limits on the floor space. Always aim to avoid any apartment financing with a floor space of less than 50 sqm. It must be 50 sqm of actual ‘living area’ (not balconies and car space etc). In special cases this may be stretched down to 40 sqm but the property would have to be in a “blue-chip capital city area”. The Bank may not impose a floor-space limit but notes that LMI might fail the application for that very reason.
Furthermore 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.
Changing from commercial or industrial to residential. Hotel conversions, holiday lettings and serviced apartments (commercial) lettings rather than residential units fall under completely different lending requirements (possibly commercial). So if they are being converted you may not get finance until the conversion is complete providing it meets all council’s ordinances and general lenders’ requirements, most lenders will proceed but there may be a reduced LVR or restrictions on LMI. The biggest reason is you’re reliant upon the performance of the management company looking after the apartments.
Number of apartments in a development: There might be a limit on the number of apartments within the one development that you can put up for mortgage insurance.
The bank may limit apartment financing on six apartments in any one development or limit lending for no more than 25 per cent of a development however this is decided on a case by case basis
-----------------More Hoops?? You Are Kidding------------------
Here are some extras hoops you may have to jump through for finance:
-More thorough valuation inspections and reports.
-A lower LVR (70 to 80 per cent max, though some, usually non-bank lenders, only go to 60 per cent) –a higher deposit required.
-Reduced maximum mortgage amount.
-More expensive LMI if even available.
-Reduced consideration of the rental income to allow for longer vacancies.
-A call for additional or cross-collateral security
-Downright refusal of application at worst!
The fundamentals of real estate remain important, not necessarily the fact that there’s a studio apartment. There are plenty of studio apartments that have doubled their value over 10 years. The unit my have great rental returns low vacancy and be located very well so a bit of hard work and research at the start may pay off long term!
So Where Now?
Will your property qualify for apartment financing?
Do you want to know how to get an apartment loan? Contact Us Here and let us help you out.
You may also be interested in this article- Investment Property Insurance