Does home size matter for a mortgage?

Purchasing a smaller property can often be more affordable than buying a larger property, and may offer different lifestyle benefits to some owner occupiers or to tenants of an investment property. However, it may be harder to successfully apply for a mortgage on some smaller properties due to the potential financial risk involved.  

Why is it harder to get a mortgage on a smaller property?

When you apply for a home loan, the lender will use the value of the property being purchased to secure the loan, much like when you buy a car using a secured car loan. The lender will organise a valuation of the property being purchased to ensure its value will be enough to cover the lender’s costs if the borrower defaults on their repayments and the lender must repossess and sell the property. 

Smaller properties, such as studio apartments and one-bedroom units, may seem riskier for some lenders to offer mortgages. This is because they may not appeal to as many types of buyers or tenants, which could make it harder for the bank to sell to other owner occupiers or investors (who may struggle to attract tenants) if the borrower was to default. Because of this higher risk, it can be more difficult to successfully apply for a loan to buy one of these small properties.

It doesn’t solely come down to a property’s size, either. A lender may be less likely to offer a mortgage to buy a property of any size that is “unusual” in some way, compared to other properties that offer broader appeal.

What are the challenges when buying a smaller property?

Some of the restrictions that may apply when looking for a small apartment home loan include:

• Size minimum limits: A lender may want you to be purchasing a property of more than a minimum number of square metres e.g. 40 or 50 sqm.
• Minimum bedrooms: The property being purchased may need to have at least one bedroom, separated from the living space by walls, to be considered acceptable.
• Minimum deposit: You may need to pay a deposit of 20 per cent of the property’s value to successfully apply for a mortgage on a smaller property. Unlike other home loans, the lender may not be willing to let you apply with a smaller deposit of 10 or 5 per cent, even if you can afford Lender’s Mortgage Insurance (LMI) costs, as this may raise their financial risk.
• Exposure limits: If the lender is already providing mortgages on other apartments in the same unit complex, or even on other properties in the same suburb, then it may be less willing to accept your mortgage application. This is so the lender can try to limit its exposure to the risk of financial loss if one event (e.g. a natural disaster) was to affect these multiple properties.
• No low-doc loans: Borrowers who don’t earn a consistent wage from an employer and thus can’t provide payslips as proof of income may not be eligible for a home loan to buy a smaller apartment from some lenders, as low-doc loans are generally considered riskier than standard home loans.

How to apply for a home loan on a smaller property

As with other types of properties, you may be able to improve your chance of home loan approval by becoming an “ideal” borrower and fulfilling the lender’s eligibility criteria as closely as possible.

Some of the options that could help improve your chances of approval include:

• Saving a higher deposit
• Paying off outstanding debts
• Cancelling credit cards you don’t use
• Improving your credit score
• Maintaining consistent employment

Contacting a mortgage broker may also help, as these home loan experts may be able to direct you to the lenders most likely to accept home loan applications for smaller apartments.

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