Getting into that first home has always been the goal of every young Kiwi.
Up until relatively recently a “first home” meant a stand-alone house on a plot of land. With the dramatic increase in property prices, especially in the main centres, owning a home has become an ever-tougher task.
Without giving up the dream of owning a home instead of renting forever apartments are now a real alternative for first home buyers. First, and most importantly, they are cheaper than a stand-alone home but they also fill the requirements of being secure and often come with amenities such as swimming pools and gyms within the complex.
Traditionally, lenders have not embraced apartments as viable house alternatives and have made their credit policies tougher when it comes to borrowing against them. More recently they have started loosening these policies to the point where some will lend on them using the same criteria as lending against a stand-alone home – up to 90% for an owner-occupied apartment.
Of all the security types apartments still divide banks the most. Some banks embrace them and others do not, they also have different lending rules depending on size, number of bedrooms, having a balcony, number of dwellings in the complex, type of complex and even the location.
Below are some general guidelines on what you can expect when looking to borrow against an apartment, the type of questions which will be asked by a potential lender and some things a potential purchaser should think about.
1. Where is the apartment?
City-fringe and suburbs have always been more attractive to the bank, from a lending perspective. The sheer number of properties in the inner-city, coupled with this location being the most affordable, has now meant that owner-occupiers and investors alike often find this an easier place to buy. Given the massive increase in value of all types of property over the last few years the banks have accepted that inner-city apartments need to be considered a serious proposition and their latest credit polices reflect this.
A BodyCorp is a professional body that looks after the external and communally accessed areas within an apartment complex. They are specialise organisations that are designed to make decisions about the upkeep of the building including amenities such as pools, gyms, laundries and carparking areas etc. There is an annual cost (normally charged in portions 2 – 4 times a year), which the owner of the apartment pays.
There are regular meetings of the BodyCorp & owners and annual financial reporting done which shows where the BodyCorp has spent the levies gathered. BodyCorp meetings also provide individual owners the opportunity to bring up issues which effect the complex in a structured meeting environment. Certain building insurances are also covered within the BodyCorp fees.
3. How many apartments are in the complex?
The number of apartments in a complex is a double-edge sword. Generally, the more there are the cheaper the BodyCorp fees and, potentially, the better the communal amenities offered – pool, gym etc. This is not always the case but there are standard costs to the running of any complex and the more owners paying BodyCorp fees the more money there is. Smaller complexes often lack the amenities of bigger ones – simply due to this quantum of funds.
4. How big is the apartment?
In the case of apartments bigger is better, at least from a borrowing point of view.
In general, banks prefer apartments that are at least 50m2 in size. We can go as small as 40m2 (internal) size with some specific banks. If the internal size is smaller than this then lending against these becomes more of a challenge. There are some limited options when it comes to smaller sized apartments and these are dependent on a number of factors. We are happy to discuss these options with you on an individual basis.
5. How many bedrooms are there?
This ties in with the overall size of the apartment above and some banks measure how much they will lend based on a combination of the two. For example, a 3-bedroom apartment of 60m2 is less desirable to a bank than a 2-bedroom apartment of 60m2.
6. Purpose built or refurbished?
Purpose built is preferred by the bank with some dictating a lower lending level if the apartment building has been converted from its original use. This prejudice is become less but it still exists.
7. Freehold or leasehold?
“Freehold”means that you own the apartment and a portion of the land on which the apartment building sits. “Leasehold” means that you own the unit but pay an annual fee to “rent” the land on which it sits. Often ground lease agreements can be reviewed and potentially increased every 7 years and this can provide some uncertainty of future payments and yield in the case of an investor-owner.
The banks also take this uncertainty into consideration and will lend less against a leasehold apartment. The upside to purchasing a leasehold apartment is that the entry cost is less as the purchase is only for the apartment and not for the land on which it sits.
Having a carpark (or more) with a unit makes the purchase cost, and value, a lot more. The largest cost of any building is the land and carparks take up more land. If the borrower is purchasing the apartment to live in and work is close, then the logic of a cheaper entry cost and using public transport can often outweigh extra $70,000 – $90,000 they will pay to have a carpark included. If there is a car owned by the purchaser then a cheaper option is often to simply lease a car space long-term in a nearby parking building.
With the population pressures effecting the rest of the world apartments have long been a viable and fully accepted form of owner-occupied and rental accommodation. In New Zealand – especially in the main centres–these population pressures are now becoming standard for us. This has resulted in a huge increase in property cost.Being a smaller type of accommodation, apartments are still cheaper, in relative terms, and provide a viable ownership alternative to renting.
Lending criteria still varies greatly between banks and at Edge Mortgages we know how to best fit specific apartments with the right lender. We specialise in apartment lending and are always available to answer any questions about apartments, and share our personal experiences with them.