Risky business – the types of properties banks get nervous about…
Banks are being extremely fussy when it comes to lending money for a mortgage on what they consider risky properties.
And if the banks are concerned about these types of properties so should you be – there’s no point trying to outsmart the lenders.
The point is that for some properties you might find it difficult to get approved for a high-LVR loan and be forced to save for a bigger deposit, while others may have the bank heading for the hills altogether!
So here’s a list of five types of properties your bank may consider risky – and why you might be better off avoiding them altogether.
- Off-the-plan developments
We’re in the thick of an apartment-building boom, and in some of the major capitals, oversupply is seriously damaging resale values and lifting vacancy rates.
One of the problems here is that the bank could find itself over-exposed if it finances too many properties in a high-density area.
So, to reduce their risk, banks set a cap on the number of loans they are willing to approve in that location.
And even if they will lend you for your proposed off the plan purchase, you can’t get a pre-approval (they only last 90 days) and generally, they’ll lend a maximum LVR of 70% or less.
2. Rural/regional towns
This is simply a numbers game.
There is usually a smaller pool of potential tenants, and even more importantly, potential buyers in regional areas.
Plus there tend to be fewer growth drivers and the rental markets tend to be more dependent on local industries.
Add to that risks of bushfires and floods, which will not only scare the bank but also push your insurance premiums sky-high, and you’ll find it’s more prudent to invest in a proven and stable inner- and middle-ring suburbs of our capital cities.
- Student accommodation and serviced apartments
The banks consider serviced apartments to be a niche type of property and since they don’t see them as great investments they usually require investors to fork out a deposit of around 40%.
This means investors need to contribute a larger deposit.
The specialised nature of this type of property and the larger cash injection investors need to contribute if they want to buy a serviced apartment or student accommodation means you will always have a smaller secondary market to sell to if ever you want to exit your investment.
This makes for the banks a little nervous and maybe you should also feel the same.
- Tiny studio apartments
A small apartment with a footprint of less than 50 square metres (not including any balcony space or car parking area) can be really tricky to get past the bank.
Why is that?
Quite simply it’s because while minimalist living is starting to take off, the marketability of a teeny apartment is seriously limiting.
They are pretty much only attractive to single people, especially if there’s no separate sleeping quarters, plus the potential to renovate or improve them is minimal.
In the event that you default on your loan and the bank needs to recoup its costs, there are only a handful of buyers they can hope to sell to, making this a risky proposition from their perspective.
- Mining and tourist towns
Tourist hotspots are vulnerable to seasonal fluctuations in population, while mining towns are at the mercy of government regulation and job losses.
It’s really a case of extremes – at the peak of the market, there’s no place you’d rather be, but when times are bad, they can be devastating.
You only have to look at the demise of the mining boom in Western Australia to see why a bank could be hesitant to finance such a property.
An area with steady, stable and sustained growth over time is a much safer investment – for the bank, and for you!