When it comes to lending, location is extremely important and it can be the reason why your application is approved or declined.
Recently, the National Australia Bank (NAB) released a list of suburbs that it identified as having rising risk in the mortgage market and a higher risk of default. To counteract the higher risk, borrowers in these postcodes would need to contribute more than 20% of the purchase price or value of the property when taking out a loan. The increased risk could have been related to income and employment in the area, falling house values or NAB’s exposure to properties in that location.
Location has two elements that have an impact on your application.
- The security property
Ability of a borrower to meet the repayments
- Establishing its value
- Its likelihood of increasing or decreasing in value
- For an owner occupied home it is the employment of the borrower that can be impacted by location
- For an investment property it is the income of the tenants in that area and their ability to make their rent payments
When a lender assesses a property and location, they use the worst case scenario at the time of application. This is to protect themselves if you default on the loan. Some of scenarios they may consider include:
- If the borrower defaults, will they be able to sell the property within a reasonable time?
- Will it hold its value?
- Are there risk factors impacting the location that may negatively impact these two?
If the location is considered higher risk by a lender it does not necessarily mean that you will not get finance, but there may be some restrictions. Some of these include:
- The choice of lenders may be reduced
- The loans available may be less competitive
- You may be required to contribute more to the purchase
- Your income, employment stability and net asset position may be more heavily scrutinised
How will I know if the location I am considering may have issues?
Location in itself can be acceptable or not acceptable to a particular lender regardless of the rest of the details of the loan. As a general rule, smaller regional locations with a population of less than 10,000 will rule out a large number of lenders. This is due to the fact that typically there are not sufficient comparable sales in the area to establish the value and this may also mean that it will be more difficult to sell quickly in the case of default (a 3 month selling period is what most lenders look for).
Lenders may also show caution in remote locations where there is a single employer or industry. As the area is relying on one source for their income, if this business or industry falls, it can cause significant financial strain for those living there.
Mortgage insurers have search functions on their websites that can let you know if the location you are considering may have restrictions placed on it by certain lenders. Access the Genworth location guide here. Category 1 is the most acceptable locations which should be accepted within limits by most lenders. Category 3 and “on application” may be harder to finance.
All lenders have copious amounts of data which they can analyse. This data is used to analyse loans that have had issues. The characteristics of these loans can be built into a scorecard which can then be used to rate new loans with the likelihood of also having issues.
If your application displays similar characteristics to the ones that had issues, your application may be declined on score. The sort of characteristics could include:-
- Credit score
- Amount borrowed compared to the value of the property
- Net asset position
- Employment stability
- Number of income earners in a household
- Excess income over expenses
See if you qualify here
In order to give yourself the best chance of success, borrowers should apply for a pre approval before making an offer on a property. By doing this, you will have an idea about how much you can borrow and can therefore confidently place an offer knowing your finances are partially sorted. See if you qualify for a State Custodians home loan in 2 minutes with our online tool.
Lenders also analyse their loan book in terms of exposure. A location may not be acceptable simply due to the fact that the lender is overweight in loans for properties in that area. Restrictions like this can apply to unit blocks and certain suburbs. A borrower will be unaware of this which is a good reason to openly communicate with your lender about the property and location you are looking at.
Tips for avoiding issues with location
- Research. Develop your own list of risk factors for a particular location and use this to compare different properties and locations.
- Search the location. Go to the mortgage insurer’s website and search the postcode of the locations you are considering. See if there are any restrictions placed on them, which may be an indicator that it may not be acceptable to some lenders.
- Get pre approved early. Do your home loan research early in the process and get formally pre approved by your preferred lender.
- Discuss locations with your lender. They will know if any of these may pose an issue and can advise you accordingly.
- Keep in contact with your lender. Ensure that you have a personal contact who you can go to with questions during your search. This may be things to do with the property but also other things might change which you need to keep them abreast of, like a change of employment.
- Act quickly. Once you find a property you are keen to negotiate on, notify the lender. Keep them informed about your offer and make sure they proceed quickly once the offer is accepted. If issues do arise, it is best to know early so that you have time to apply with another lender.
- Proceed with caution. If lenders are being cautious about a location or type of property, use this as a sign to carefully consider why. Although they are looking at it from a different perspective, the things that they are looking for are not necessarily different to what you are – good location that will appreciate in value over time, sufficient employment in the area for you and a tenant to have a steady income and the ability to sell the property when you need to.
At State Custodians we give you direct access to a Lending Specialist who can guide you throughout the process and can move quickly to get full approval once you have settled on a particular property. Chat to our friendly team today on 13 72 62 or leave your details here and they will contact you.
Find out more about other home loan options and get tips on what to look for: