How a bank looks at your property

Wouldn’t it be nice to know that when you plan to approach a lender, you will have an idea about how they will look at your potential  purchase?  There are some properties that the banks will treat more favourably than others and Bryce Holdaway tells us which ones.
Kevin:             When it comes to buying an investment property, it’s always handy to know how favorably the banks are going to look upon your investment.  There are some properties that banks like, and others that they don’t.  Let’s find out a little bit more about this.  Bryce Holdaway, who is the director of Empower Wealth, and also the star of “Location, Location, Location Australia” joins us.  Good day, Bryce.  Thanks for your time.
Bryce:             Hi, Kev, how are you?
Kevin:             Good, mate. Are there some properties that banks favor over others, Bryce?
Bryce:             Yeah, I always think that it’s always a good sign to ask the bank of they would be prepared to give you mortgage insurance on a particular property.  That’s often a very good way to measure a risk of a particular property.  If you think about a standard residential property in a built-up area, the bank would be quite comfortable lending you 90 or 95 percent of the value, and therefore issue lenders’ mortgage insurance.
However, some properties, they won’t do that on.  Things that come to mind are student accommodations; service departments where they find it a little bit more risky, and the pool of buyers that are willing to buy if they put a “for sale” sign out the front.  You don’t have the same pool of buyers, so they would consider that a bit more risky.  That’s usually a good little tip to find out whether the bank would see it as a good investment or not.
Kevin:             That lenders’ mortgage insurance; just explain how that works, Bryce.
Bryce:             Basically, if you want to borrow … standard scenario is you borrow 80 percent and deposit 20 percent plus costs either through cash or maybe using other forms of security, i.e. the principal place of residence, to get the loan.  In some cases, the bank will actually let you go higher; 90 and 95 percent.  That’s on properties that they consider an acceptable risk.
If they won’t lend you lenders’ mortgage insurance, that’s usually a good sign that they consider it a bit more risky in the marketplace.  I see that as a sign for exercising some caution.
Kevin:             What you’re suggesting is actually going to the bank and asking that question before you commit to the property?
Bryce:             Yeah, talk to your bank or your investment-savvy mortgage broker.  Ask them that question; which ones do they consider a fair credit risk, and which ones do they consider more risky than others?  That can give you a good sign.
For example, I spoke to someone this week and he asked me about a service department, and whether or not that’s a good investment.  I said, “Before I even judge on that, go and talk to your broker and ask them what sort of lending they will give you on that.  That’s usually a good starting point.”
He came back to me and he said, “You’re right.  They’ll only lend me 65 percent on that.”
Kevin:             I know the banks were very sensitive, some time ago, to properties; particularly units under 50 square meters.  Has that tolerance improved a bit?
Bryce:             I think that’s a really good point that you put out, Kevin.  Sometimes, some banks will actually let you … it used to be, 50 square meters used to be the magic number.  In some cases, if it’s 40 or 45 square meters, you can sneak it through with some lenders.
The key is, only some lenders will do that.  For me, that still puts you at a bit of risk.  When it comes time to sell it, and you put a “for sale” sign at the front, you want the maximum number of buyers that you can get.  If some of them have got lending restrictions and some of them don’t, to me that’s not giving yourself the best chance.  Particularly, if you’re going to send the value around, you want to make sure that they don’t place any extra risk on it, and downplay the valuation that they put on the property.
Kevin:             Always good advice.  Bryce Holdaway, who is the star of “Location, Location, Location Australia, and also a direct of Empower Wealth.  Bryce, always great talking to you.  Thanks for your time.
Bryce:             Likewise.  Thanks, Kevin.  Chat soon.

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