When it comes to finance, even if two properties are nominally worth the same – i.e. $700,000, the type of property can have a big impact on how a bank will treat that property, and the potential terms under which they will fund a purchase.
A standard residential house or unit, open to both owner occupiers and long term rental, is really the gold standard as far as having the greatest overall appeal, and therefore the lowest risk for a bank when it comes to providing the finance to purchase it. Generally this is where we see banks happy to do lend on a 80% LVR (loan to value ratio) with a 20% deposit, or a 90% LVR (10% down) with LMI (lender’s mortgage insurance) for most borrowers.
Stepping outside those parameters though, the risk profile can go up, and the bank’s requirements can go up with it. Smaller or holiday let units can be a good, simple example in this case. Take for example the plethora of tiny units (under 50m2) we can find in a lot of older hotel style developments, with either studio or 1 bedroom layouts and a very compact floorplan. In those cases, given there is a smaller buyer pool for a mini apartment compared to say a house or larger unit, banks see a higher risk and accordingly will often be looking for 30-40% down before they will let you borrow the rest. The frustrating thing here for a lot of buyers though is that these properties are frequently quite cheap (under $100,000) in a lot of cases, but buyers with budgets that low often don’t have the higher deposits required to buy. A bit of a catch 22.
Properties that are restricted to holiday letting can be similarly viewed by lenders. If you can’t live in it long term, then again its restricted to investors only, has a smaller buyer pool and that higher risk translates back to more money down. This in turn can mean prices stay lower than for an otherwise comparable unit with full occupation rights, between the more specific buyer and of course these higher finance requirements.
While a duplex can be keenly sought after, blocks of units while lucrative can be similarly challenging to finance once you hit more than 4 in a row. Not impossible, but worth knowing about!
Cash is king and being able to act without needing a bank solves a lot of issues, but if you are looking at something a little different in your next property, make sure you double check before assuming finance will be fine.