When it comes to a mortgage, buying an apartment is not as straightforward as buying a house. In general the banks assess whether to provide a home loan for an apartment far more rigorously. As a result it is not uncommon for sales to fall through because the buyer fails to get the adequate finance in place to complete the transaction.
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Buying ‘off the plan’ can be risky
Sometimes a sale falls through because a potential buyer has sought to buy an apartment ‘off the plan’. This means entering into a legally binding contract to purchase a property ahead of construction, based only on the building plans and specifications.
When you obtain pre-approval for a home loan it will be conditional and it will have a time limit. When you buy off the plans you run the risk of the period of time that the pre-approval covers running out before the construction is complete. In that situation approval will have to be sought once more and this time the bank may refuse lending.
Even if the time limit doesn’t run out you have to be careful of the conditions. Just because you met the lending criteria at the time you paid the deposit doesn’t mean you will now. For example, the valuation of the new build may have gone down causing the bank to lend less. There is more that can go wrong when it is ‘off the plan’.
Freehold vs leasehold apartment
A leasehold apartment is one in which you own the apartment itself but rent the land. These apartments are generally cheaper to buy, however it is harder to obtain mortgage approval for a leasehold property as they are secured against the building alone.
Other factors that your bank will consider for a leasehold apartment are how much your annual ground rent is and how often a rent review takes place. If land prices increase significantly a rent review could mean an astronomical rise in the cost of the lease.
A freehold apartment may be more expensive but in terms of getting a mortgage, it’s much less of a headache.
Size of the apartment
Size is a significant factor when it comes to obtaining finance for an apartment: although the exact details vary between banks, the bigger the apartment the easier it is to get a mortgage. There are even some sizes below which banks will just flat out refuse to lend. Carey Brunel from HomeLoan.co.nz says “A bank friendly apartment size is generally anything above 50sqm”.
In recent times, this threshold has increased. For example last year BNZ announced that it would no longer provide standalone lending to people purchasing apartments smaller than 65 square metres. There is no reason to say that such a threshold won’t increase again.
And if you are buying ‘off the plan’ your contract with the developer might permit them to change the apartment size without your consent. It is important to read the fine print.
As with any property purchase, but particularly with apartments, the higher the deposit that you have, the more willing a bank will be to lend. Showing that you have 30% or 40% equity may persuade the bank to lend to you.
In addition, the more security you can offer the better. A property investor for example may be able to cross-collateralise the apartment against other property and borrow up to 100% of the purchase price.
It is also highly recommended to avoid leaky buildings as even large apartments in that predicament can be very difficult to obtain financing for.
And finally, make sure you shop around. One bank might refuse to provide lending but it doesn’t necessarily mean that all will. Sometimes it is as simple as one bank refusing your mortgage because too many owners in the one building have a mortgage with them. In which case another bank may comfortably step in to assist.