Very small apartments sit outside what most lenders will take as security. Of the lenders we checked, only four had a documented policy that allows a home loan on an apartment under 40 square metres, and three of those stop at 30. Below 30 square metres we found one, and it lends a maximum of 60 per cent of the price, with no lenders mortgage insurance available to go higher. That means a deposit of at least 40 per cent, plus purchase costs.
How the size is measured
Lenders classify the property by the internal area shown on the valuation report, not the figure in the advertisement. Balconies and car spaces are not counted, so an apartment marketed above the threshold can still fall below it.
What the example in the video assumes
The comparison uses one apartment at $400,000 with purchase costs of about 5 per cent, gross rent of 6 per cent, holding costs of about $7,000 a year and an assumed interest-only rate of 6 per cent, before tax. The rate is an assumption for illustration, not a quote from any lender. On those numbers, the higher loan needs less of your own cash but runs at a small annual shortfall, while the lower loan needs more cash and runs at a small surplus. Which one produces the better return on your money depends on what prices do, and the crossover is at roughly 2 per cent growth a year.
Lender policies change. Check the current policy and your own circumstances before relying on any of this.
Video transcript
Apartments under forty square metres are hard to finance. Of the lenders we checked, only four will consider them, and below thirty square metres just one, at a maximum of sixty percent of the price, with no mortgage insurance to top it up.
Hi, I'm Jack Si from Australian Finance Service Solutions.
The lender goes by the internal area on the valuation report, not the size in the advert. Balconies and car spaces do not count.
So what does this mean for you?
Take the same four hundred thousand dollar apartment, with an assumed six percent interest only rate and six percent gross rent. At eighty percent, you put in about a hundred thousand dollars, and the property costs you about two thousand two hundred a year. At sixty percent, you put in about one hundred and eighty thousand, and it pays you about two thousand six hundred a year.
Now the return on your own money. If prices rise three percent a year, eighty percent wins, nine point eight against eight point one. If prices are flat, sixty percent wins. And if prices fall three percent, eighty percent loses fourteen percent of your money in a year, sixty percent loses five.
The break even is about two percent price growth a year. Above that, more debt pays more. Below it, less debt does better. And if you are investing for income, not growth, you do not need high leverage at all.
Every situation is different, so the right structure depends on your numbers.
If you want us to look at your situation, send us a message.
You can find us at A U F S S dot A U.
This is general information only and is not credit advice.
Want us to look at your situation? Send us a message or call 1300 968 888.
General information only, not credit advice. It doesn't take your personal circumstances into account.
Jack (Muyuan) Si is a Credit Representative (516785) of Buyers Choice Licencing Pty Ltd ACN 626 172 281 (Australian Credit Licence No. 509484).