Unusual Property Mortgages

2011 May 17

Buying property is thrilling, stressful, and a little frightening. There are so many terms to understand, and an incredible amount of paperwork to sign. Interest rates have to be considered, along with down payments. Buying a standard home is a relatively simple process that most people are familiar with. But what happens when you’re trying to buy an unusual property? You will find that the process for buying these properties is a little different. It can be done, but it’s important to know what to expect.

Mortgage Terms

Loan to Value Ratio (LVR)
This is simply a quick way for lenders to know how the amount loaned compares to the actual value of the property. The amount of the mortgage is divided by the appraised value of the property in question. Most banks like the LVR to be below 80%. If the LVR is higher than 80%, they will require you to get Lenders Mortgage Insurance (LMI) to help protect their investment.

Commercial Mortgage
This mortgage is required to secure real estate that will be used for business purposes. Commercial mortgages are used for buying office space, warehouses, retail stores, and some rental properties.

Residential Mortgage
This mortgage is designed for buying houses and other residential property. Fees and interest rates are typically lower than for commercial mortgages, and lenders will allow higher LVR’s.

Torrens Title
Most people think of their home and understand that they are the ones listed on the title. A single document names the absolute owner. This is known as a Torrens title, it is the most common type, and getting a mortgage for one is a relatively simple process.

Strata Title
This title is for a privately owned property that is connected to another property. Apartments and town homes that are privately owned, for instance, would have Strata titles. The property is defined as the airspace occupied by an individual unit, and a strata corporation is created to take care of common areas used by multiple owners. Mortgages with these titles are also relatively simple.

Community Title
When an entire community has common areas such as parks, playgrounds, or pools; a Community title is necessary. It covers a subdivision or neighbourhood and allows all the individual home owners to also have ownership in, and responsibility for, the community areas. These are also basic titles that do no usually present problems for borrowers.

Company Title
These titles date back to the pre-Strata title era. Before apartments and townhomes were divided up into individual dwellings with each property defined as the occupied air space, ownership was addressed with a company title. The apartment building or town home was owned by a company. People wanting to buy a townhouse would not simply buy that home, but would buy shares in the company. The problem with these mortgages is that the other owners in the company, your neighbours, have to give consent for anyone to sell, lease, or mortgage their individual unit. Banks do not like these titles, and buying a property that uses one can be challenging.

What the Bank Looks For

This is high on the banks priority list of concerns. A general rule of thumb is that higher risk properties will be limited to lower loan to ratio values. When a property is more desirable and easier for the bank to sell you can borrow more money against the value.

The bank wants to know that they can recoup their money if you default. Properties that only appeal to a few people are harder for the bank to sell and will be harder for you to get a mortgage on. 

Stable Value
Banks like knowing what a property will be worth over the life of the mortgage. When a property has a history of an unstable value, most lenders will be leery of it. If the value fluctuates too much over the years, the bank will require a lower LVR, so you’ll have to put more money down.

Legal Issues
Banks don’t like legal issues and challenges. They want to know that they can sell your property if you don’t make the payments. Company titles, in particular, are not something banks want to get involved with. You can still get a mortgage, but you might wind up having to lower the LVR by making a larger down payment.

Unusual Properties Types and Their Challenges

Luxury Properties with High Price Tags
Luxury mansions are great to look at and visit, but most lenders hesitate to put up their money for them. When you’re looking at properties valued at over two million dollars, lenders want to limit how much of that value they are actually holding. The reason is simple. If you default on the loan, the bank wants to know that they can sell the property and at least get back the money they have paid out.

Inner City or High Density Buildings
It seems like such a great idea to buy an apartment building and become the ultimate landlord. But then you go for financing and start running into challenges with mortgages. Some lenders simply don’t like financing these buildings. They may have several types of restrictions regarding building size, location, height, and how many apartments it has. Luckily, you can still find mortgages for these structures. The trick is to find a bank that doesn’t have a specific inner city property policy, or high density building policy.

High Rise Apartments
While these buildings may be nicer and more luxurious than an inner city apartment building, it can still be challenging finding a company that will write a loan. These unusual properties often run into the same challenges as inner city properties.

Company Title Properties
As discussed before, these multi-unit properties have a more involved process for buying or selling any units. Because the neighbours have a say in the transaction, most banks are leery to get involved at all. It is possible to find lenders that will go up to 85% LVR, but most try to stay below 60% LVR.

Serviced Apartments
These buildings are designed for short-term stays. They typically do not have permanent residents, but people who need somewhere to stay for a few weeks or a few months. They are usually furnished and serviced by the entity that owns the building. A lovely investment for rental income, finding mortgages for these properties can be problematic.

There are lenders who will still provide mortgages on these unusual properties, provided certain requirements are met. The requirements can be quite stringent, but may allow you to go up 80% LVR, depending on the bank. If the requirements can not be met, you may be limited to 50% LVR.

Multiple Properties on a Single Title
It is possible to have multiple properties placed on a single title. Some investors prefer this for simplicity. The problem is that when too many properties are listed on a title, the bank will define those properties as being commercial units. This works greatly in the banks favour, because you will have to take a commercial mortgage with a lower LVR and higher fees. You will fare much better on terms and lending amounts if you choose a lender that will still allow you to take a residential mortgage on the properties.

Mortgages are available for any of these property types. The key lies in knowing why the banks will avoid making the loan, and how to work around the issues. You can get a home loan on a luxury property; you just have to know what type of lender to search for. There are mortgages available for unusual properties, as long as you know how to work with the bank.

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