Whether home size matters in your mortgage is a topic that often looms large for prospective homeowners. Purchasing a smaller property can often be more financially viable than buying a larger one. It may offer various lifestyle benefits for both owner-occupiers and tenants of investment properties.
For tenants of an investment property, smaller units can provide more affordable rental options in desirable locations. They might be beautiful to singles, young professionals, or individuals seeking to downsize their living arrangements. Smaller properties often offer convenience and proximity to urban amenities, making them desirable for those prioritising location and access to services.
Getting A Home Loan on a Smaller Property
Obtaining a mortgage for a smaller property can be more challenging due to several factors. When applying for a home loan, lenders assess the property’s value as collateral, similar to securing a car loan with a vehicle. They arrange a property valuation to ensure that its value would cover their costs if the borrower defaults and the property needs to be repossessed and sold.
Smaller properties, such as studio apartments and one-bedroom units, may be perceived as riskier by lenders when offering mortgages. This is because these properties might have a limited appeal to potential buyers or tenants, making it more difficult for the bank to sell the property to owner-occupiers or attract tenants in case of default. The higher perceived risk associated with smaller properties can make securing a loan for their purchase more challenging.
Lenders may also be hesitant to provide mortgages for properties of any size considered “unusual” compared to properties with broader appeal. These “unusual” properties may have unique features, unconventional layouts, or unconventional locations that make them less marketable and potentially less desirable to potential buyers or tenants.
The Challenge
Several challenges may arise when buying a smaller property. These challenges can include:
Size Minimum Limits
Some lenders may have minimum size requirements for the properties they finance. For example, they may prefer properties above a certain number of square meters, such as 40 or 50 sqm. If the property you are interested in falls below this minimum size, securing a mortgage may be more challenging.
Minimum Bedrooms
Lenders often have requirements regarding the number of bedrooms a property should have to be considered suitable for a mortgage. Typically, they prefer properties with at least one bedroom, separated from the living space by walls. If the property lacks this minimum requirement, it may be challenging to obtain financing.
Minimum Deposit
When purchasing a smaller property, lenders may require a higher deposit than other home loan types. They may expect a deposit of 20% of the property’s value. Even if you can afford to pay for Lender’s Mortgage Insurance costs, some lenders may be reluctant to accept a smaller deposit of 10% or 5%, as it increases their financial risk.
Exposure Limits
If a lender has already provided mortgages for other apartments in the same complex or properties in the same area, they may be more cautious in approving additional mortgage applications. Lenders may significantly seek to limit their exposure to the risk of a financial loss if multiple properties could be affected by the same event, such as a natural disaster.
No Low-Doc Loans
Borrowers with irregular income who cannot provide traditional payslips or proof of consistent employment may face difficulties obtaining a home loan for a smaller property. Some lenders may not offer low-documentation loans to purchase smaller apartments, typically riskier than standard home loans.
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