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The banks’ least favourite property types

The banks’ least favourite property types

Often there can be a good property deal to be had, but will finance be readily available? There are more and more types of properties that banks are either refusing to lend against or will only offer a relatively low Loan to Valuation Ratio (LVR). They’re known as “specialised securities” and it pays to know which they are before becoming too heavily invested. Check with your lender before spending too much time on due diligence for a property that might be difficult to lend against.

Student accommodation is a good example of this. There are usually good rental returns to be enjoyed (however not so good for capital gains), but many lenders are hesitant to lend against this type of property. Before signing any contract of sale, it’s important to know if your lender is comfortable with the type of property you are interested in.

Increasingly, it’s not only the lender themselves who have the issue here – it’s also increasingly the mortgage insurers. Without this insurance, not even the big banks can afford to take this level of risk.

Here’s a list of properties to beware of if you’re looking to get finance with a reasonable LVR:

Rural Zoning – Properties that are off the beaten track, for example farmhouses or vineyards in rural locations, frequently attract fewer buyers than those in residential areas. It’s difficult to obtain mortgage insurance on these properties and because of this most lenders will only allow around 60% Loan to Valuation Ratio (LVR).
Heritage Listed – A heritage listed home means owners can be restricted in altering the property (or will at least have difficulty). Banks view these as a more limited type of security so may be more wary to lend against these types of properties.

Here’s a list of other property types that may be difficult to obtain lender’s mortgage insurance for:

  •     Vacant land where the borrower has no plans to build a dwelling
  •     Commercial or industrial properties
  •     Time-share properties
  •     Properties located outside Australia (Mainland and Tasmania only) – coastal islands on application
  •     Properties affected by:

– Floods
– Contamination
– Land slip
– Mine Subsidence

  •     Exhibition homes
  •     Resort style dwellings
  •     Mobile homes
  •     Studio apartments and bed sitters
  •     Security properties subject to resumption orders by State or Commonwealth authorities

Remember check with your lender before investing too much time on due diligence for a property that might be difficult to lend against.

Hotel/Motel Conversions – At times hotels are bought by investors and converted into units to be sold or tenanted individually. It sounds like easy money, but unless the neon sign, shared laundry and games room are completely removed, it can be difficult to get rid of the hotel vibes. They fall into the non-typical category and are often trickier to sell.

Company Titles – There’s more restrictive lending criteria for units subject to company title, where a company owns the block and each apartment has an allocated number of shares. This means that investors will become shareholders in the company rather than owning the property directly. Torbreck on Dornoch Terrace in Brisbane’s Highgate Hill is an example of this style of ownership which was superseded by the Strata Titling system that we now use. Banks are more cautious regarding these sorts of investments because the ability to foreclose on a share is more legally complex than taking security over a strata title property.

Retirement Villages – Whilst our aging Baby Boomers make this a growing market segment, the fine print in some of these contracts means that most of the capital gain can be controlled by the developer, putting banks into the second mortgage position which simply is not their preference.

Leasehold Properties – Properties can be purchased on a leasehold basis, often from the government on a long-term lease. These government leases are usually close to 100 years, and although the Queen (aka The Crown) still overrides ownership of all land in Australia, most Australians still feel more comfortable buying “freehold”. South Bank has a considerable number of leasehold apartments on State Government land.

Apartments under 50m² – some apartments like the student accommodation developments in the inner Brisbane CBD (average size 18 to 22 m²) will also often attract the attention of lenders and mortgage insurers. While the rental returns can be above average, it’s best to steer clear unless a solid deposit is available.