Studio Apartment Loans

Maximising Your Borrowing Potential for Studio Apartments

Studio Apartment Financing 101:
What You Need to Know Before You Apply for a Loan.

What is a Studio Apartment and How Do Lenders Finance Them?

We often receive questions about studio apartments and how they differ from traditional apartments. Simply put, a studio apartment is a self-contained living space that typically consists of two rooms: a main living area that serves as the kitchen, dining, living, and sleeping area combined, and a separate bathroom.

What sets studio apartments apart is their compact size, which can range from as little as 15 square metres (sqm) to around 50 sqm. Because of their size, they are sometimes also called:

  • Studio Flats,
  • Student Accommodation,
  • Bachelor Apartments, or

When it comes to financing a studio apartment purchase, lenders classify these smaller units as studio apartments if they are up to 40 sqm in size. Lending decisions are based on the financial strength of the applicant and the size of the property. While some lenders may be more hesitant to finance studio apartments due to their size, there are still plenty of options available for buyers who know where to look.

In addition, studio apartments can be a smart choice for buyers looking for an affordable and efficient living space, plus for first home buyers a stepping point to enter into the property ladder, as well as for property investors seeking a potentially lucrative opportunity. By understanding what defines a studio apartment and working with an experienced mortgage broker, buyers can navigate the lending process with confidence and make informed decisions about their investment.

Is Investing in Studio Apartments a Smart Move for Cash Flow Positive Returns?

Studio apartments can be a viable investment option for generating cash flow positive returns if approached strategically. However, it is essential to keep in mind the following points:

  • Rental Returns: Studio apartments tend to have higher rental yields than traditional one or two-bedroom apartments, particularly in resort areas across Australia.
  • Strategic Approach: By researching the rental market and potential rental returns in the area you are interested in investing in, you can make informed decisions about whether investing in a studio apartment is a smart move.
  • Investment Opportunities: Whether you are a first-time homebuyer looking to get onto the property ladder or a seasoned property investor seeking cash flow-positive investments, a studio apartment can be an attractive investment option.
  • Research: Consider the location of the apartment and the rental demand in that area, as this will impact the potential rental income.
  • Financing Options: Some lenders may be hesitant to finance studio apartments due to perceived risks associated with these properties. Therefore, working with an experienced mortgage broker can help you find lenders who understand the value of these properties and are willing to provide financing.

What Are the Requirements for Applying for a Studio Apartment Loan?

When it comes to financing these types of properties, there are a few key factors that lenders consider.

Firstly, lenders determine the loan amount based on the internal size of the studio apartment, excluding balconies and car spaces. It’s important to keep in mind that lenders typically require the unit to have a kitchenette and laundry facilities that are not shared with other apartments or units in the building complex. In addition, a self-contained unit with a dividing wall between the living area and the bedroom is preferred.

By meeting these basic requirements, buyers can increase their chances of obtaining financing for a studio apartment purchase. Of course, it’s also important your own financial situation is able to meet the lenders borrowing criteria to service your current liabilities as well as the new proposed borrowing.

Furthermore, purchasing a studio apartment can be a smart investment choice for buyers who are looking for an affordable and efficient living space or for property investors seeking a potentially lucrative opportunity. By understanding the lending requirements, buyers can make informed decisions about their investment and secure the financing they need to make their dreams a reality.

A Golden Rule!

How to Strategically Invest in Studio Apartments for Cash-Flow Returns.

What Are The Borrowing Options For Studio Apartments?

Studio apartments are a popular choice for first-time homebuyers, investors, or those looking for a holiday retreat. However, borrowing for these properties can be a challenge, as not all lenders offer financing for studio apartments.

To qualify for a loan, lenders typically require that the studio apartment have a kitchenette and laundry facilities that are not shared with other units in the building. It should also be self-contained with a dividing wall between the living area and bedroom. The loan amount is based on the size of the studio, with lenders excluding balconies and car spaces from the calculation.

Studio apartments can range in size from 15 square meters to 50 square meters, with 50 square meters or more being the ideal size for borrowers. The larger the living area, the more lenders are likely to offer financing options. For example, for apartments ranging from 18 to 40 square meters, borrowers can expect lending from 60% to 80% against the property value, with a limited number of lenders available. For apartments ranging from 45 to 50 square meters, more lenders may offer financing options, with lending ranging from 80% to 95% against the value.

It’s important to note that mortgage insurers may not approve loans for high-density apartment complexes with more than 35 apartments. In such cases, lenders must rely on their own credit policies to approve a loan amount of 80% borrowing against the property value.

When considering borrowing for a studio apartment, it’s important to find a high-quality property in a desirable and high-demand location. For such properties, the minimum living area may be 40 square meters, which would allow borrowers to use a smaller deposit on the purchase – as low as 5% for owner-occupied properties, or 10% to 20% for investors.

Apartment Size Guide for Borrowing:

  • 18 to 40 sqm size = Lending from 60% to 80% against the value. ~ (Minimal Lender choice)
  • 40 to 45 sqm size = Lending from 80% to 95% against the value ~ (Several More Lenders)
  • 45 to 50 sqm size = Lending from 80% to 95% against the value ~ (More Lenders)
  • 50 sqm & above = Lending from 80% to 95% ~ (Many Lenders available at 50sqm size apartments).

Can I Borrow 100% for a Studio Apartment?

It is possible to borrow 100% for a Studio Apartment, but there are certain factors to consider. For first-time buyers, a deposit of 5% to 10% is still required. However, there are a couple of options available for investors who have additional security to offer.

One option is to cross-securitise two properties to purchase the Studio Apartment. This means that the loan may be structured at 100% of the apartment or unit’s value with equity drawn from the other property. This method may be suitable for those who have equity in another home or investment property.

Another option is to consider a Guarantor Loan, where a family member acts as a guarantor for the loan. The guarantor can use the equity in their own home or investment property as security for the loan. This type of loan may be set up as a limited guarantee loan for the deposit required on the available equity.

It’s worth noting that lenders prefer cross-securitisation or guarantor loans as the overall exposure for the lender is minimised. With these loan structures, it is possible to have a 100% loan on the Studio Apartment or Unit.

Can I Buy a Studio Apartment on a Low Doc Loan?

Low Doc or Low Documentation loans are restricted to 40 sqm and above, unit or apartment size with a borrowing capacity of 60% to 70% loan amount to the value of the property or security. For LoDoc loans, the size of the apartment, and borrowing capacity, must meet a lender’s credit policy.

Other important points to consider when applying for a Low Doc Loan for a Studio Apartment include:

  • Interest rates for Low Doc Loans may be higher than standard home loans.
  • Low Doc Loans may also have additional fees and charges, such as Lender’s Mortgage Insurance, which can add to the overall cost of the loan.
  • Some lenders may also require a larger deposit for a Low Doc Loan compared to a standard home loan.

It’s important to note, before entering into a purchase contract of sale, it is important to seek the guidance of a Credit Adviser/Mortgage Broker or contact us at Neomoney. This will help you find a lender that fits your requirements and ensure that you do not face any obstacles during the purchase process.

What Type of Apartments do Lenders Not Consider For Loans?

When it comes to lending for apartments, lenders and mortgage insurers have specific criteria and requirements that they look for to minimize their risk exposure. Some apartment types may not be eligible for a loan.

We’ve listed below the types of apartments that lenders may not consider for lending:

  • Boarding house or hostel style units.
  • Company share title (VIC).
  • Company title.
  • Crown land (excluding the ACT).
  • Leasehold properties (excluding Crown Land in the ACT).
  • Limited title (properties with any defects).
  • Properties subject to “mines subsidence”.
  • Properties subject to the Western Lands Act.
  • Properties with “lease of life” covenants on title.
  • Purple title (WA), or Moiety title (SA).
  • Strata title home units with a living area of less than 40 sqm.
  • Units under a “time share” arrangement.
  • Units with serviced apartment agreements.
  • Serviced units on a lender’s unacceptable security register.

It’s essential to keep in mind that different lenders may have different criteria, and some may be more flexible than others. Consulting a mortgage broker can be beneficial in finding a lender that suits your requirements.

What Should I Consider When Looking For a Studio Apartment to Purchase?

Studio apartments are a popular investment option due to their potential for positive gearing, but it’s important to keep in mind certain factors when looking for the right property.

Here are some key points to consider:

  • Loan-to-value ratio: Lenders tend to lend less on studio apartments, with some only offering a 60% loan on the value of the property. Keep this in mind when budgeting for your purchase.
  • Minimum size requirements: Mortgage insurers and lenders may not lend on properties that are less than 50 sqm, with a minimum living area of 40 sqm internally (excluding balconies and car space). Be sure to check these requirements before making an offer on a property.
  • Additional costs and levies: Studio apartments often come with onsite amenities, such as a gym or pool, which can add to the cost of owning the property. Be sure to factor in any additional fees or levies when budgeting for your purchase.
  • Location: Studio apartments can be slow to sell outside of CBD areas. Consider the location carefully before making an offer, and think about the potential resale value of the property.
  • Unacceptable Security Register: It is important to check whether the Studio Apartment you are considering is listed on the lender’s or mortgage insurer’s Unacceptable Security Register, which means that the apartment may not be accepted as security by any lender or mortgage insurer. In case the security is accepted, the Loan-to-Value Ratio (LVR) may be limited to 50% to 60%. To determine whether the property is listed on the Unacceptable Security Register, you can consult with your Credit Adviser/Mortgage Broker or reach out to us for assistance.

I’m Ready!

Are you ready to take the next step towards your dream home? Our team of mortgage specialists is here to help you find the perfect loan product tailored to your unique needs. Whether you're seeking credit advice or simply looking for more information, we're here to answer any questions you may have.

To get started, just click on the enquiry button below and we'll be in touch with you shortly.

Let's make your homeownership dreams a reality!