OPINION: Buying an off-the-plan apartment? 3 red flags lenders are watching out for, and you should too

By Steve Jovcevski, Property expert and lending expert at financial comparison website mozo.com.au

You don’t need to look far across the skyline in any major Australian city to see evidence of the recent apartment boom, where cranes and new residential buildings have become a semi-permanent fixture. For many home seekers in Australia, apartment living is becoming an increasingly attractive alternative to houses because of the convenience and relative affordability they offer. But just like houses, apartment buyers still need to do their due diligence before they make a purchase, especially with questions surrounding the quality of new builds and a continued focus on borrower loan serviceability. So to point you in the right direction, mozo.com.au Property Investment and Lending Expert, Steve Jocevski, has shared some of the red flags lenders are currently looking for. 

Is the apartment quality up to scratch? 

If you’ve been following the news you’ll be aware of the rising number of cases of subpar new residential buildings that have been cropping up, especially in Sydney, as well as cladding flammability issues across the country. That’s why one of the biggest red flags for lenders, and one of the first things you should determine as a buyer, is the quality of the building - particularly new builds. Before you buy, it’s a good idea to do your research on the developer and builder (especially if you’re buying off-the-plan) and ensure you inspect the apartment in person for structural or waterproofing issues. It’s also a good idea to spend the time going through strata minutes or attend a strata meeting to gauge the issues that are being discussed. If you know you want to purchase an apartment in a particular building, you should contact your lender straight away and let them assess it for themselves. After all, the last thing you want to do is get your heart set on a blacklisted building or make a bid on an apartment that your lender refuses lending for.

Is the area oversupplied or apartment too small?

Lenders may be paying closer attention to the quality of individual buildings, but the continued apartment boom in recent years has meant that the postcode restrictions put in place by a number of banks in 2017 are still in play. Lenders have red-flagged certain inner-city postcodes and other suburbs where apartments are oversupplied in order to reduce their own risk and ensure that they’re not overexposed in any one area. For buyers, this doesn’t mean that lenders will totally restrict lending on apartments in a particular suburb, but it does mean that they will require a lower home loan loan-to-value ratio (LVR) of around 70-80%, and therefore a higher deposit. Speaking of LVR restrictions, it’s still common practice for lenders to red flag smaller apartments and some off-the-plan builds. Lenders generally don’t like apartments smaller than 40sqm, so borrowers eyeing off a small apartment may need to come up with a deposit of as high as 30-40% in order to secure a home loan.   

Do you make the grade as a borrower? 

While back-to-back rate cuts have really ramped up the competition for borrowers between mortgage lenders, they are keeping an eye out for certain red flags. The spotlight still remains on expenses, with lenders looking as far back as three and even six months in some cases at borrower’s spending habits. This is to ensure that borrowers have the income and ability to pay off their loans, and it includes everything from everyday expenses to things like eating out and Afterpay purchases. My advice for future apartment buyers would be to really cut back on your spending in the months before you apply for a loan so you can prove that able to meet your repayment obligations and you don’t present as a red flag. Secondly, think carefully about your credit history before applying. The lower your credit score, the higher the chance is that a lender will see you as a risk, so consider reducing your credit card limit, paying off any outstanding personal loans and, when you are ready to start shopping around, limit the number of lenders you apply to.

About Steve Jovcevski

Steve is a property expert and lending expert at financial comparison website mozo.com.au. With an extensive knowledge of property trends and home loans products, Steve is full of practical tips to help Aussie buyers find their next property for less.

Lead image credit: Hans Eiskonen