The saying ‘safe as houses’ doesn’t apply to every property. In fact, when it comes to financing, they’re not all created equal. There are some types of properties that banks consider risky. So, whether you are searching for a residential home or an investment property, it’s good to know the types that banks don't like. This way you can set your property search to avoid these risky properties, and you’ll be much more likely to secure finance once you find the right space.
Types of properties that banks consider risky
Every lending institution in Australia has its own lending criteria for its home loan products. An integral part of this criteria is to minimise the lender’s risk in approving the home loan. In other words, banks and other lenders will only lend to borrowers who they believe can service the loan and repay the amount borrowed with associated interest and even if there is a downturn in the property market.
This means that the property for which the loan is made must also be robust and not risky. Let’s walk through five types of properties that banks consider risky.
Off the plan
Buying a unit off-the-plan has the inherent risk of the unknown. Off-the-plan developments are considered one of the types of properties that banks consider risky because of these unknown elements. They might worry:
Will construction be completed?
Will it be completed on time?
What is the quality of the construction and fixtures?
Is the property located in an area that will ‘boom’ or is it already a high-density area with significant vacancy rates?
Banks and non-bank lenders may set a cap on the number of loans they are prepared to approve for off-the-plan developments. This is to avoid the lender being financially over-exposed in one specific area of the property market.
Studio apartments, small apartments, serviced apartments and student accommodation
We’ve gathered all the ‘s’-properties into this category. Studio apartments, small apartments, serviced apartments and student accommodation. (By ‘small’, we’re referring to apartments of less than 50 square metres (not including parking spaces or external areas). These properties tend to all be owned by investors rather than lived in as a homeowner’s place of residence.
You may think that these small properties have a ready-made, steady stream of people looking to rent them. But unfortunately they too are considered one of the types of properties that banks consider risky.
Potential buyers are limited to property investors or single people. Lenders prefer properties to be attractive to a wider pool of buyers.
Renters tend to be short term, securing the property for a semester or set period of employment. This means that the apartment will sit empty in certain time periods, such as over school holidays.
There will most likely be a property manager of some kind involved, which means that the costs associated with the sale and management of the property will be higher.
The value of the apartment may include furnishings. Over time, furniture breaks and loses value, which impacts the overall saleability of the property.
There is limited scope for renovation or property improvement.
Geological issues
Properties with geological issues are also considered one of the types of properties that banks consider risky. A beachfront property may be your retirement dream – but does it have an associated risk of coastal erosion of your land? In high rainfall, will a gorgeous river or creek-side property be impacted by flooding? These issues will mean that your lender will likely see the property as a higher-risk investment on their part.
Rural, mining, tourist towns
Smaller towns or towns in remote locations tend to experience less frequent and a lower volume of property sales. A property for sale may sit on the market for months or years, waiting for the ‘right’ buyer. This will occur more often in rural areas impacted by drought, in towns that depend on a thriving local industry such as mining or in tourist towns that experience a downturn in popularity and holiday bookings.
Any factor that reduces the pool of potential buyers sets the warning bells of ‘risky’ ringing for banks. We’ve talked more here about the best cities for property investors.
Restricted postcode’ properties
Another way that banks and non-bank lenders will limit their lending risk is to lend to people who are financially able to service their home loan. Statistically, buyers who purchase properties in certain postcodes have a higher chance of defaulting on their mortgage.
Because of that, lenders may set a rule that prohibits them from lending to buyers in that postcode or that sets tighter lending restrictions. While that might not seem fair to the individual purchaser, the lender sees it as a valuable way to minimise their overall risk.
Every bank has its own ‘postcode’ criteria. Many lenders will deny home loan applications for properties in their ‘restricted postcode area’. If a lender does approve a home loan for a property in this area, it may come with higher costs, such as a high LVR or a requirement to save a higher deposit before loan approval.
Find the Right Property For You
Now that you know the types of properties that banks consider risky, it will be much easier for you to choose a property that will be a shoe in for getting finance.
Of course if you do have your heart set on a small unit or a regional property, that’s certainly OK. Get in touch. We’ll help you choose the right property and the right lender to set you on the right track.
Talk risk with us
At Lending Loop, we are experts in all aspects of home loans including advising on the types of properties that banks consider risky. Get in touch with us to talk through your dream property. We can help find the best home loan for you from more than 40 of Australia’s biggest banks and specialist lenders.So, give us a call today at Lending Loop.
