What property types are excluded or restricted by banks during pre-approval?

One of the least understood parts of getting a loan is that the lender is not only assessing you, it is also assessing the property. A pre-approval can look strong, then run into trouble once you choose a particular home, because some property types are restricted or harder to finance. Knowing the common ones in advance saves a lot of heartache.

Why lenders care about the property type

The property is the lender security. If a loan goes bad, the lender needs to be able to recover its money by selling the property. So it cares about how easily the property could be sold, how stable its value is, and how much risk it carries. Property types that are harder to sell, or whose values are more volatile, are treated more cautiously, regardless of how good a borrower you are.

Small and high density apartments

Very small apartments, and units in large high density buildings, are a common sticking point. Many lenders apply a minimum internal size and may be wary of buildings with a very large number of units, particularly in areas seen as oversupplied. The result is often not an outright no, but a requirement for a larger deposit, a lower maximum loan to value ratio, or a decline from some lenders while others remain comfortable.

Studio, student and serviced apartments

Studio apartments, student accommodation, and serviced or hotel style apartments are frequently restricted. They can be harder to resell to ordinary buyers, and serviced apartments in particular may be tied to management agreements that complicate ownership. Financing these often requires a specialist approach and a larger deposit, and some lenders will not lend against them at all.

Off the plan purchases

Buying off the plan carries a particular risk. The valuation only happens near completion, which can be a long time after you sign. If the valuation at completion comes in below the price you agreed, you can face a shortfall you have to cover. A pre-approval obtained at the time of signing does not guarantee the finance will be there at completion, so off the plan needs careful planning.

Company title and unusual title types

Most properties are held on standard title, but some older apartments are held on company title or other unusual arrangements. These can limit your choice of lender, attract a lower maximum loan to value ratio, or be declined by some lenders, because the ownership structure is more complex and the resale market smaller. It is always worth checking the title type before you commit.

Rural, lifestyle and large acreage

Rural properties, lifestyle blocks and large acreage can be restricted, especially where the land size is large, the zoning is rural, or the property relies on tank water and off grid services. Lenders may cap the land size they will lend against, treat part of the value as residential and part as something else, or require a larger deposit. Genuinely rural or income producing properties can move into a different lending category altogether.

Postcode and location restrictions

Some lenders apply location based restrictions, capping the loan to value ratio or declining altogether in certain postcodes they view as higher risk, such as areas seen as oversupplied or with volatile values. Two buyers with identical finances can get different outcomes simply because of where the property is. This is another reason the choice of lender matters once you have a specific property in mind.

What this means for your pre-approval

The practical lesson is that a pre-approval is conditional on the property as well as on you. You can be perfectly approved in principle, then have the approval affected once you choose a restricted property type. The way to avoid disappointment is simple: before you fall in love with a particular home, especially an apartment, an off the plan property, or anything unusual, check with your broker whether it is likely to be acceptable security and on what terms.