Photo: Paul Rovere
It doesn’t matter which bank, property experts say Australia’s lenders won’t give you money for risky investments.
But mortgage lending is a crucial part of how banks make money and homeowners are very important customers to keep and grow, according to AMP Capital chief economist Shane Oliver.
“Housing has been an important source of growth for the banks in recent years, particularly as the property markets in Sydney and Melbourne took off,” Dr Oliver says.
“There would have to be a good reason for a bank to turn a customer away … Whilst they want to continue to grow their businesss, they don’t want to do so in a way that involves a lot of risk.”
Perhaps the best red flag, then, is if a mortgage application — otherwise all in order — gets stamped with a big fat rejection.
So what properties are more heavily scrutinised by lenders and mortgage insurers? Is there a real estate blacklist?
We asked the banks — and most said they look at each mortgage application on a case by case basis.
But these are the things property pundits say have Australia’s lenders breaking out in a cold sweat.
1. An apartment smaller than 40 square metres
Small ‘dog box’ apartments under 40 square metres may be hard to get financed. Photo: Craig Abraham
The exact square-meterage is up for debate, but most property advisors say a very small apartment will have the banks concerned.
“Each bank varies, but 40 square metres can be a cut off for many,” Greville Pabst, head of property advisory WBP Property Group, says.
“Because they’re really small, therefore their marketability is challenged in the future and banks don’t like that. In the situation where they might have to take possession, they want to be able to get their money back.”
Bessie Hassan, money expert at finder.com.au, agrees: “The more attractive the property is to the market and the greater demand there is for that property type in the area, the more likely they will be to finance the property,” she says.
“Generally, the apartment needs to be at least 45 or 50 square metres, excluding the balcony and any car spaces, in order to qualify for a loan. If [you] want to invest in a studio apartment smaller than this, accessing finance may be difficult.”
Empower Wealth director Ben Kingsley says the minimum is about 40 square metres and also believed studio apartments — accommodation without separate sleeping quarters from the main living area — were on the hit list.
Size matters particularly for Melbourne buyers, given the Victorian state government recently decided to not to introduce minimum dwelling sizes.
But Jellis Craig chief executive Nick Dowling says banks generally won’t go below a 40-square-metre internal floor plan, even in Melbourne.
“That’s for standalone clients, if it’s mixed into a bigger portfolio, it’s not so much of an issue,” Mr Dowling said.
2. A student apartment or serviced apartment
Student housing is on the list, according to some buyers’ agents. Photo: Josh Robenstone
Mr Pabst says the banks will view properties attached to a business element, such as student accommodation or serviced apartments, as more risky.
“Because in the event that the business has any financial problems, that impacts on the accommodation as well,” he says.
“So, for example, if the government changes their policy on migration or the number of students allowed in to the country, that’s something the banks don’t have control of, and then that will affect their security.”
Serviced apartments are often leased through a business operator, he says, which the banks also don’t have control over. Many commonly include furniture packages in the purchase price, which banks don’t like to lend on, he says.
3. A property in a ‘bad’ or ‘risky’ neighbourhood
Mining towns such as Kalgoorlie might be hard to secure loans for. Photo: Erin Jonasson
A property within a high crime or high unemployment area, or ones that pose a greater credit risk, may raise a red flag to a lender, Ms Hassan says.
“For example, last year NAB identified postcodes where it will restrict loan-to-value ratios due to concerns that homeowners may default and due to limited sellability potential,” she says.
At the time NAB said certain postcodes, from inner-Sydney Glebe to Cabramatta in the south west of Sydney, were areas “where significant deterioration in credit risk has been observed”.
“Some individual banks do have overexposure to a particular areas,” Mr Dowling said. “They need ensure they have the right balance between owner occupier loans and investor loans in areas.”
Mr Kingsley added mining towns as a possible concern. “Exposure to one-industry economies and the subsequent economic shocks these towns do go through, leave banks exposed.”
4. Cookie-cutter apartments in oversupplied suburbs
Numerous cranes in the sky is a sign of risk, according to economist Shane Oliver.Photo: Jessica Shapiro
“The main reason for nervousness on behalf of the banks is the ongoing increase in supply of apartments,” Dr Oliver says. “The banks are particularly wary of postcodes where there’s a lot of cranes and a lot of new supply coming down the pipeline.”
Those areas are mainly inner ring suburbs, he says. “Their concern there is buyers might find themselves vulnerable if the property market does eventually turn down.”
Buyers considering investing in apartments or units should first consider the scarcity of what they’re buying, according to Mr Pabst.
“With cookie-cutter apartments, there’s no scarcity, they’re homogenous and that’s why they don’t perform,” he said.
Mr Dowling said the issue was with bigger projects, not smaller suburban boutique projects, which were very healthy.
5. Properties with unusual titles
Forms of ownership other than strata titles can makes banks nervous.Photo: Louie Douvis
The property experts flagged stratum titles, company share titles and tenants in commons titles as presenting a risk to lenders, because they may take longer to sell later.
“Banks are certainly more wary and cautious of those forms of ownership,” Mr Pabst says. “Because quite often the bank won’t have first right of priority.”
6. Properties with structural issues
Structural issues could be a concern for the banks. Photo: Glen McCurtayne
Ms Hassan says people should avoid buying properties sight unseenbecause they may not be able to vouch for its structural integrity.
“This could get you in hot water when it comes to getting approved for a loan,” she says. “If the property has structural or other issues, such as if it doesn’t comply with building code or if it contains asbestos, lenders may be hesitant about offering finance as this minimises the saleability of the asset.”
7. A property with geological issues
Mr Driscoll says that banks will increasingly look at certain geological risks with properties, such as those built on marshland or on the coast. For example, he said, Sydney’s northern beaches experienced damaging storms earlier this year that left properties in ruin.
“A bank [lending] there to someone with a 10 per cent deposit, who is buying a $2 million or $3 million property, will think, ‘geez, only a few months ago that place got absolutely decimated’,” he says. “Their lending criteria is built on risk assessments, so if there’s a history of [natural disasters], they’d have to factor that in.”
What the banks said…
Domain contacted the four major banks — Commonwealth, ANZ, NAB and Westpac — as well as ME Bank.
A ME Bank spokeswoman says buyers looking at properties with commercial usage (for example, aged housing or serviced apartments) and apartments smaller than 40 square metres may be declined a home loan, however, sometimes lending policies could accommodate an exception.
“Banks need to ensure they can sell properties easily and at a similar value in the event a customer can no longer repay their loan,” the spokeswoman said.
A Commonwealth Bank spokesman says: “We constantly review and monitor our home loan portfolio to ensure we are maintaining our prudent lending standards and meeting our customers’ financial needs. We assess every home loan application on a case-by-case basis.”
A spokeswoman for NAB said: “As a responsible lender, we adopt a range of strategies that seek to reduce the risk to our customers and our business, and consider applications for lending based on a range of factors, including the value, type and use of a property, and local market conditions.”
We received no response from Westpac or the ANZ.