What Properties are considered Risky by Banks?

I think the answer to this question is having an understanding of what properties the bank would be comfortable letting you have lenders mortgage insurance on, and that’s a scenario where if you borrow more than 80% of the purchase price, so 85% – 95% of the purchase price, the bank will actually give you lenders mortgage insurance (LMI). There are some properties the banks just won’t touch, and the most obvious ones are properties under 50 square meters. I think the key to understanding this is: the ones the bank’s consider “most risky” are the ones that don’t have a large pool of people interested in them.

So, as I mentioned, the first thing that comes to mind, are properties under 50 square metres —  student accommodation, holiday lets or commercial properties. If they are in a position where they must put the property back on the market because of some former jurisdiction that investor has, they want to be confident they can actually get a quick sale. So this is usually owner-occupied properties, something over 50 square meters, something that is not in a block, or something that doesn’t have too many restrictions — and by that I mean if you’ve bought a serviced apartment for example; generally the bank can’t put a “For Sale” sign on the front and sell it to an owner-occupier because, usually, there are some management agreements in place, which means it has to go back into the pool. So they consider that a little bit more risky.

The advice when it comes to investing in property, in my opinion and in my experience, is buy something the banks would be comfortable giving you mortgage insurance on. Because that’s a really good way to work out if the general market place has a large pool, or if there’s a small niche pool of buyers willing to buy that property. Because if you go down the track when you want to buy multiple properties, when it comes time to revalue against that property … you might find that you’ve hit some glass ceilings. You have some equity in that property, but the bank still says, “Look the property is a bit risky so we’re not prepared to lend any money.” Or, they’re prepared to give you a lower LVR and what that might actually do is hamstring you, as you go to build your property portfolio.

So my mantra, when it comes to buying investment properties, is buy something that has owner-occupier appeal, something that has scarcity and something that is investment grade — what’s interesting is the banks would lend lenders mortgage insurance to all of these properties . So look for properties where the banks will be happy to do this.