Written by When it comes to buying property, often it is more affordable, particularly when buying your first property, to purchase an apartment rather than a house. While an apartment is more than likely the cheaper option, there are also details associated with taking out a loan for an apartment which you will need to be aware of.
Here we guide you through apartment loans, what differentiates them from other types of home loans, and what factors you should bear in mind as you begin your apartment loan process.
What is an apartment loan, and how do they work?
An apartment loan is exactly what it sounds like- a loan that a property buyer takes out in order to purchase an asset that can be categorised as a unit, apartment or studio apartment. While this seems self-explanatory, an ‘apartment loan’ is in fact a worthwhile distinction from home loans more broadly. This is because lenders view different asset classes differently to one another and based on their perceived value, will be willing to take on more or less risk.
Apartment loans require the potential property buyer to provide a certain percentage of the property value as a deposit, after which a lender such as a bank or home loan company provides the difference in order to make the purchase happen. These loans can include several features which when combined together in certain packages, can drastically change the nature of the loan and how it will best work for your finances.
How can apartment loans differ from regular home loans?
Apartment loans differ from regular home loans in that often lenders will require a larger initial deposit from the loan applicant as a hedge against making an investment in an asset which provides a different level of security than other asset classes such as a house. Because lenders will ultimately seize your property in the event that you default on your mandatory mortgage repayments, they must be willing to provide a loan for a property that can then be sold for a reasonable value in order to recover their initial investment.
Your deposit amount will depend both on the type of apartment you plan to buy, as well as your need to minimise fees and ongoing interest repayments. As outlined above, for apartments which are deemed to be a less risky investment, you will only need a minimum of a 5% deposit on your loan, or a $20,000 deposit for a $400,000 apartment.
For an apartment smaller than <50m2 you will likely be required to provide a 10% deposit, or $40,000.
On apartment loans where you will be providing a deposit of less than a 20% deposit, your loan will be subject to lenders’ mortgage insurance (LMI). This is an added cost which provides insurance to the lender in case of the event that the borrower defaults on their repayments and ensures that the lender is repaid their debts owing in full. LMI costs rise and fall depending on the LVR of a loan, as well as the total loan amount, however, for the sake of our example, let’s use the $400,000 figure we applied in the answer above.
The impact of LVR on LMI costs
| 85% LVR | 90% LVR | 95% LVR |
|---|---|---|
|
$3,770 |
$6,943 |
$11,897 |
| Apartment types | Required LVR |
|---|---|
|
Regular apartment |
95% |
|
<50m2 apartment |
90% |
|
>40m2 Studio apartment |
80% |
|
<40m2 Studio apartment |
Ineligible for finance |
The types of Home Loans
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Pros and cons of apartment loans
Lower cost of entry into the property market.
The absence of upkeep required to maintain lawn or a garden.
Potentially closer proximity to popular amenities and public transport.
Access to apartment building facilities such as pools and gyms.
Lower likelihood of your property appreciating in value over time.
CPossible restrictions with potential renovations, extensions and remodelling.
Obligatory additional costs such as body corporate fees.
Potentially higher LVR requirements.
More of your questions about apartment loans
There is no guarantee that property assets will appreciate in value over time because markets are impossible to predict to a degree of absolute certainty. However, you can buy a property with a higher chance of value appreciation by purchasing in areas which you believe will be desirable in the future, ensuring that the area does not have an oversupply of apartments, and by buying an apartment that has a level of uniqueness and character to it.
For those who wish to take advantage of the first home owner’s grant for newly built properties, apartments offer an appealing prospect as new builds in inner-city areas are more commonly found to be apartments as opposed to houses or townhouses.
Yes, there can be extra costs associated with buying an apartment which are not present when buying a house. The most common of these extra costs is body corporate fees, which are paid to the organisation which manages your building and covers repairs, maintenance and services.
Absolutely. Many first time property buyers choose to buy apartments as they are more affordable, and then turn these into investment properties down the line when they are ready to buy a new property as their designated primary place of residence.
The approval process for an apartment loan is similar to that of a normal home loan, however there are some things you can do to improve the chances of your application being successful, considering the ambiguity surrounding the security value of apartments as assets.
By using a guarantor you can improve the standing of your application. Other ways to improve your likelihood of success are to apply to buy an apartment in an area that does not have an oversupply of apartments, to target an apartment which is of a sufficient size and is likely to hold its value over time, or look for apartments that are not off-the-plan.
Not necessarily! Just because there are more things to consider when applying for an apartment loan, it doesn’t mean that it’s not the right option for you. Apartments can still be a very appealing option for prospective buyers, and should still be considered so long as the factors mentioned above are kept in mind.
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