Home loans for apartments, where size does matter

Lenders can reject your home loan application if the apartment you're buying is too small.

Buying an apartment is often much more affordable and practical than buying a house, particularly for first home buyers. But it's important to know that this is one of the times where size really does matter.

While getting a home loan for an apartment can be a seamless process and no different to buying a house, there can be restrictions on apartments that you should be aware of.

Why are there restrictions on getting a loan for an apartment?

Lenders can be more cautious when approving home loans for apartments. This is because the lender uses your property as security for your loan.

So, if you are unable to repay your loan, the lender can force the sale of your property to recover your debt.

However, apartments can be harder to sell than houses, especially very small apartments or studio apartments, which is why the lender may not choose to take the risk.

To improve your chances of getting a loan for an apartment approved, you can save a bigger deposit, shop around for a lender with more flexible lending criteria or get expert advice from a mortgage broker.

Expert insight

"You need to ask yourself, 'Is this a good investment if the bank won't lend me money for it?' Generally, it's the land that appreciates in value, and when you're looking at an apartment with less than 50 sqm of building space on the 6th floor, it often comes with minimal land value. In real estate, size is crucial, particularly for achieving long-term growth and building equity."

John Pidgeon
Director and Head Property Coach of Solvere, Director of Envisage Property

Reasons for rejection

Every lender will have their own restrictions about apartment lending. But here are the most common reasons they reject apartment loan applications:

  • The apartment is too small

As a general rule, the apartment will need to be at least 45 or 50 square metres (excluding the balcony and any car spaces) in order to qualify for a loan.

  • No separate bedrooms (studio apartment)

If the apartment doesn't have separate bedrooms it is a studio apartment. Some lenders won't lend for these properties, or will require a bigger deposit.

  • Postcode restrictions

There are a number of reasons that certain postcodes may be restricted by lenders. It could be that the area has too many apartments, that it's too rural or it's in something like a mining town.

If you apply to buy in a restricted postcode, your lender might reject your application, ask for a bigger deposit or limit the amount you can borrow.

  • The apartment has a company or stratum title

Most apartments have a strata title. But there are other property titles, such as company or stratum titles. These are much less common, and ownership is structured differently. Lenders are reluctant to lend to anyone buying an apartment with a company or stratum title.

  • The property is not a residential apartment

It's much harder to get a home loan if you're buying an apartment that isn't designated as a residential property. This includes commercial properties or serviced apartments.

  • You're buying off the plan

When you buy an off-the-plan apartment you're often putting money down before the apartment is built. A lot can happen in the months and years between signing the contract and the completion of construction. Prices can fall. Your lender might reject your loan application or value the apartment below what you paid for it.

In that case the lender might approve a smaller loan amount, forcing you to come up with extra cash to meet the shortfall.

So, how can I get a home loan for an apartment?

If you're worried about applying for a loan for an apartment, there are a few things you can do.

1. Work out your borrowing power.

Understand what size apartment you will be looking at by working out your borrowing power.

2. Save a bigger deposit.

The larger the deposit you've saved, the greater your chances of approval. Having a minimum 20% deposit saved can significantly increase your borrowing power.

3. Speak to lenders.

If you know the rough size of the apartments you're looking at and the area you're looking in, check with different lenders about potential apartment restrictions. Do this before you submit any applications, as multiple credit applications can reflect poorly on your credit score.

4. Get help where you can.

A mortgage broker can help you find a lender that has no issues with your apartment or postcode. If your deposit is too small, you could boost your borrowing power with a guarantor.

5. Get pre-approval.

Once you know which lenders are willing to lend for apartments, you can apply for pre-approval. By getting pre-approval from a lender you know how much it is willing to lend to you. This gives you a much clearer idea of what apartments you should be looking at.

Example: An apartment buyer shops around for a home loan

Brian has just signed a contract to buy a 2-bedroom apartment in inner-city Melbourne. He has a 20% deposit saved. He also has pre-approval with his bank.

But when he applies for a loan the bank says he'll need a 30% deposit. Why? Because there are lots of 2-bedroom apartments in his postcode and the bank's worried it is over-exposed to this type of property.

Brian can't come up with a 30% deposit on top of stamp duty and everything else. Instead, he enquires with an online lender. Before applying he emails the lender and is put in touch with someone from the credit assessment team. They assure Brian that there's no issue with his address or postcode, and a 20% deposit is fine.

He applies, is approved, and buys his apartment.

Frequently asked questions about home loans for apartments

John Pidgeon's headshot
To make sure you get accurate and helpful information, this guide has been reviewed by John Pidgeon, a member of Finder's Editorial Review Board.
Richard Whitten's headshot
Editor

Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206), a Tier 1 Generic Knowledge certification and a Tier 2 General Advice Deposit Products (RG 146) certification. See full bio

Richard's expertise
Richard has written 553 Finder guides across topics including:
  • Home loans
  • Property
  • Personal finance
  • Money-saving tips
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2 Responses

    Default Gravatar
    DavidMay 30, 2017

    Are there any lenders that now finance properties under 40sqm?

      Default Gravatar
      LiezlMay 30, 2017

      Hi David,

      Thanks for your question.

      Although most lenders require at least 45 or 50 square metres of floor space, there are still lenders who finance smaller apartments. Unfortunately, we do not have them in our panel of lenders.

      If you’re looking for financing, it would be best to enlist the services of mortgage brokers who can help you find suitable lenders.

      Cheers,
      Liezl

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