There has been a lot of discussion about the impact of foreign buyers on the Australian market, well the brains behind the most respected website catering to that market has some interesting insights and we ask our finance expert, Andrew Mirams, if size really matters to the banks.
Kevin: It’s important to make sure that any property investment you make provides capital growth and consistent, attractive rental yields. That’s according to Andrew Mirams from Intuitive Finance, who joins us.
Good day, Andrew.
Andrew: Good day, Kevin. Thanks for having me.
Kevin: That’s a pleasure, mate. Are you telling me that to the banks, size does matter?
Andrew: Absolutely. I guess the key in today’s market with the amount of new property investment and the new projects coming onto the market, this probably does affect more of the newer projects than the old or existing properties, but absolutely, square meterage of a property definitely does matter.
As a rule, generally, at 50+ square meters, it’s viewed as a pretty standard deal. Under that, down to 40 square meters, we can certainly finance. Anything under that becomes really, really difficult just based on the pure size.
Kevin: Yes, , I remember when the benchmark was 50 and it was difficult to get lend on anything under 50 square meters. But once you get down to 40 and even under, it’s almost like a motel room really, isn’t it?
Andrew: It is basically a studio. Yes, it’s basically a bed and everything all in the same room. There’s not a whole lot there. The reason they don’t like it is because of the marketability. There is a very small market for those properties. Obviously, the bigger units – a one- or two-bedroom unit, and then you move up to your houses – there’s a much bigger concentration of people wanting to buy those.
A studio apartment or a student accommodation – which generally attract these smaller sized properties – are very segmented and very specific. The bank will always look at their worst-case scenario and what’s their exit clause should the client not be able to meet their repayments. There’s just a small market, and small apartments tend to be very difficult to be able to sell should they have to.
Kevin: One of the attractions, of course, for those small apartments will be the price, making it very, very affordable, but then you have to look past that and, as you pointed out, how marketable are they? Is that, in two senses, basically, whether you can resell it or even whether you can let it?
Andrew: Absolutely. Letting, they generally get a pretty reasonable return – they’re smaller units – but the issue, yes, is the salability and things like that. With the smaller units, the smaller type style, you’re right, they attract an entry level. But often, those entry level people don’t have their full 20% deposit and need to mortgage insure it. The mortgage insurers just won’t go near anything under 40 square meters, and often we have issues at anything less than 50 square meters if people are looking to borrow more than the 80%.
Kevin: Yes, generally, those smaller apartments are used for either student accommodation or serviced apartments, and the income from those is not really all that good. Also, the costs of running them – the management fees because they’re cleaned so regularly and turned over so much – Andrew, that’s another consideration.
Andrew: Absolutely. They also have management in there so you’re paying for people to maintain the properties. Often, there will be lifts and other style of things that all are high maintenance. It might be a small apartment that gets an okay rental but with your overheads and things like that, that has a definite knock on it and affects the price and its saleability and why the banks don’t really like them too much.
Kevin: There you go: property size and use does matter to the banks. That good advice coming from Andrew Mirams at Intuitive Finance.
Andrew, thanks again for your time.
Andrew: My pleasure, Kevin.