Why Do Some Properties Get Knocked Back for Finance When the Buyer Doesn't?

QUICK ANSWER

A home loan application involves two separate assessments. One looks at the borrower and their capacity to repay. The other looks at the property being used as security. A buyer can pass the first and still be declined on the second. Studio apartments below a lender's minimum floor size, serviced apartments, company title properties, mixed-use buildings and properties in high-density postcodes all sit outside standard policy for part of the market. Policy differs between lenders and changes over time, so a knock-back from one lender is not a statement about the property's financeability generally.

If you have been told a property cannot be financed, the assumption most buyers make is that the problem is them. Their income, their deposit, their employment history, their existing commitments. In a meaningful number of cases, none of that is what happened.

What happened is that the property fell outside a lending policy.

What is the difference between serviceability and lending policy?

Every home loan application runs two assessments in parallel.

Serviceability is the assessment of the borrower. It asks whether the applicant can afford the repayments, and it takes in income, expenses, existing debts, employment stability and the buffers a lender is required to apply under the Australian Prudential Regulation Authority's serviceability standards.

Lending policy is the assessment of the security. It asks a different question entirely: if this loan were ever to go bad, how readily could the lender recover its position by selling this property? That question has nothing to do with the applicant's income and everything to do with the characteristics of the asset.

The two assessments are independent. Passing one does not carry the other. And because the second one is rarely explained to buyers in any detail, a decline that came from policy often gets heard as a decline that came from capacity.

Which property types most often sit outside standard lending policy?

Five come up repeatedly in the Sydney market and across Australia more broadly.

Small studio apartments

Most lenders set a minimum internal floor size for apartments used as security, and where that line sits varies between them. Below it, a property may be capped at a lower loan-to-value ratio, restricted in other ways, or declined outright. The reasoning is about resale — a smaller pool of future buyers, and a smaller pool of future lenders willing to finance those buyers.

Serviced apartments

Hotel-style apartments generally come with a management agreement attached to the property. That agreement affects who controls the asset, how it is valued, and how readily it can be sold on the open market. Many lenders treat serviced apartments as something other than standard residential security as a result, even where the apartment itself looks entirely conventional.

Company title properties

Some older buildings, particularly in established Sydney suburbs, were never converted to strata title. Instead of owning your apartment directly, you own shares in a company that owns the building, and those shares carry the right to occupy a particular unit. It is a legitimate and long-standing form of ownership. It is also one that fewer lenders will accept, and those that do typically require a larger deposit.

Mixed-use buildings

An apartment above a shop, a café, a workshop or a similar commercial premises. The residence itself is usually not the issue. The commercial use downstairs is what gets assessed, and the nature of that business can affect the outcome as much as anything about the apartment above it.

High-density postcodes

Some lenders limit how much total exposure they will carry in areas with a high concentration of apartment stock, or a large volume of apartments under construction. In practice this often means a lower maximum loan rather than a flat refusal. These lists are also reviewed and revised — an area restricted in one period may not be restricted in the next.

Does a knock-back on one of these mean the property cannot be financed?

No. It means one lender's policy did not accommodate it.

Lending policy is not a national standard. It is a commercial position each lender takes on what security it is comfortable holding, and those positions differ from one lender to the next and shift over time. A property that falls outside policy at one institution can sit comfortably inside policy at another.

This is the part that gets lost. A single decline is frequently treated by buyers as a definitive answer about the property, when it is a specific answer from a specific lender at a specific point in time.

What should you do if you have been told a property is not financeable?

Change the question you are asking.

The instinctive question is whether the purchase is affordable. That question has usually already been answered — if serviceability was the problem, you would have been told so directly.

The more useful question is which lender will assess this property on what it actually is.

Answering that requires knowing where different lenders draw their policy lines, which of them have moved recently, and which will look at the specific characteristics of the property rather than applying a category rule to it.

It is also worth resolving before you commit rather than after. A property that gets financed on a structure suited to it and a property that gets financed on whatever was available look identical on settlement day. They can look quite different three years later, when the question becomes whether you can use that property to do anything else.

Why does this matter for a first purchase in particular?

First purchases are rarely just first purchases. The structure put in place at the start sets the constraints on what follows — whether equity can be accessed, on what terms, and how quickly.

A buyer who finds a way through a policy restriction and a buyer who walks away from the property both end up somewhere. Only one of them ends up somewhere they chose.

FREQUENTLY ASKED QUESTIONS

Can a lender approve me but decline the property?

Yes. Borrower assessment and security assessment are separate. Conditional approval based on your financial position does not guarantee that a specific property will be accepted as security once it is assessed.

Are studio apartments hard to finance in Australia?

Some are. Most lenders apply a minimum internal floor size for apartments used as security, and that threshold differs between lenders. Studios above the threshold are generally treated as standard security. Studios below it may face restrictions with some lenders and not others.

What is company title and why do lenders treat it differently?

Company title means you own shares in a company that owns the building, rather than owning your apartment directly under strata title. Because the security a lender holds is shares rather than real property, fewer lenders accept it and those that do usually require a larger deposit.

Does a shop underneath an apartment affect the loan?

It can. In a mixed-use building, lenders assess the commercial component as well as the residential one. The type of business operating below can influence whether the property is accepted as security and on what terms.

What is a high-density postcode restriction?

It is a limit some lenders apply on how much they will lend in areas with a high concentration of apartments. It commonly results in a lower maximum loan rather than a refusal, and the affected areas are reviewed and change over time.

ABOUT THE AUTHOR

George Capital Finance Solutions is a Sydney-based mortgage broking, debt advisory and commercial finance business, founded by George Frazis. The business works with clients across Australia on residential lending, commercial finance and debt structuring, operating under Connective Credit Services, Australian Credit Licence 389328.

Level 3, 219 Castlereagh Street, Sydney NSW 2000. Telephone (02) 9072 9288.

General information only. Not financial advice. This article does not take your objectives, financial situation or needs into account. Individual outcomes depend on individual circumstances. Lending policy varies between lenders and is subject to change.