Security Property - What Will Lenders Accept?
Over the past few months, we’ve seen much activity in lenders changing or altering lending policy around the types of property they will accept as security for a home or investment loan.
Many lenders are concerned with the high number of new apartments being constructed in and around 5km of Melbourne’s CBD - an estimated 9500 by the end of 2017. So is it any wonder that lenders have tightened up on their lending policies, especially where apartments are involved as security?
Here are our golden ‘Do’s and Don’ts’ of buying inner city apartments – our opinion based on industry trends….
- Do buy an apartment that is 50sqm internally in size at the very least – some lenders have already started to put a minimum size requirement of 60sqm internal living space. Size matters, so we strongly recommend making this a critical requirement with your next property.
- Do make sure you negotiate the best possible price based on recent ‘real’ comparable sales data and not what people are saying the property will be worth in years to come – CBD real estate, unless it is very unique, will not realise capital growth at the same rate as homes/units in the suburbs. It’s a fact based on results to date, supply and demand and our eternal love of the good oldAussie dream – owning a home with a backyard. However, it’s also a fact that CBD real estate will, on average, yield better rental returns.
- Do make sure you have saved at least 20% deposit plus your costs – many borrowers forget that when you buy real estate there are costs involved - these can be between 5-6% of the purchase price, so just scraping up 20% is not enough. You will need at least 25% as a deposit to present a strong loan application given some mortgage insurers are seeking to minimise risk.
- Don’t buy a property nearing completion for a premium price as the ‘second’ buyer – generally, the original buyer has already paid higher than value for the ‘off the plan’ purchase and may be trying to unload the property because they are unable to secure lending e.g. they may have been pre-approved originally to borrow up to 90% at a time. However through the construction phase, lenders started to tighten policy, and in the absence of extra savings, these investors are unable to secure final funding to complete their transaction. Take your time and negotiate confidently
- Don’t buy an apartment in areas of high supply (e.g. CBD/city fringe) thinking you can hold for only 2-3 years and make a profit. Learn from the Docklands scenario and the amount of people who bought off the plan 7-10 years ago – values are still the same or lower in some cases today.
- Don’t rush into purchasing a CBD serviced apartment if you are looking at getting your loan approved with minimal issues. Generally speaking, lenders prefer to steer clear of this type of property, as they may regard as too high a risk in the event they have to sell to clear a borrower’s debt on a mortgage default.
You should always do your own research and ask the selling agents plenty of valid questions. You can also ask your broker to provide relative information around the properties you are considering (e.g. recent sales and average price/growth in recent years). A good broker will be able to provide you with relevant data and general advice on many properties, keeping in mind the end value is determined by the buyer.
As always, enjoy life, work hard, play safe and remember that we are always here to help you
‘Take the Confusion Out of Lending’
Peter Vinci - 0438 041 111