When it comes to getting a mortgage, the conversation usually revolves around whether a person or couple can qualify for a mortgage. And rightly so; it takes a lot to save for a deposit, and mortgages aren’t cheap, so income and savings are essential. But when it’s time to buy a home, it’s not just the applicants being assessed for a mortgage; the property they want to buy is also evaluated and either approved or declined.
So, what do the banks look at when considering a property for a mortgage?
1 Property condition:
Banks may require a building inspection report to assess the overall condition of a property due to its construction type or age.
Issues that will give the bank pause include:
- Structural issues, such as foundation problems, subsidence, or structural damage.
- Water tightness issues. If there’s an indication or risk of leaks, the bank will likely require moisture readings to assess the severity.
- Cladding type: Properties with a plaster cast (stucco) cladding are known to have a higher risk of leaks. Banks are very wary of “monolithic cladding”, a plaster cladding system used widely from the mid-1990s to the early 2000s. The cladding is a combination of plaster and polystyrene, topped with a thin membrane. This cladding was often inadequately installed, with poor moisture management resulting in water damage, rot, and mould within the wall cavities.
- Rot and moisture damage, internally and externally.
- Significant infestation of borer that could affect the property’s structural integrity.
- Asbestos paint/materials. Asbestos is a health risk when released into the air and is expensive to remove safely.
- Significant electrical or plumbing problems.
The bank won’t necessarily decline a property that needs extensive work. However, they will consider the applicant’s ability to cover the cost, and to be able to pay for someone else to complete the work in case you can’t. If the mortgage will be over 80% LVR then the estimated maintenance must cost less than $5,000 to stay within the banks’ risk tolerance, each bank will evaluate it according to their policy of the day.
2 Property risks:
High flood zones
Banks check the property’s LIM report to determine if a property is in a high flood zone. Check out your local council’s maps to find out which areas are high flood zones.
Properties in flood-prone areas are at a higher risk of damage from rising water levels during heavy rainfall or natural disasters. The LIM report also details the property’s stormwater and wastewater systems. Properties zoned as at risk of flooding require good drainage and appropriate foundations. These properties may have higher insurance premiums or, in the worst cases, be uninsurable. With many instances of devastating and costly flooding in early 2023, this risk is top of mind for many and is linked to the next risk: climate change.
Climate change risk
Banks are increasingly considering climate risk when assessing properties for mortgages. This can include factors such as whether the property is coastal or on low-lying land, the expected impact of future sea-level rise and increased storm activity. Properties in areas prone to climate risks will likely face high insurance costs or even be uninsurable in the coming years.
The bank will also take into account any recorded hazards in the LIM report, such as proximity to landslides, coastal erosion, geological risks, and contaminated land assessments.
Christchurch TC3 land
Properties on Technical Category 3 (TC3) land in Christchurch are known to have a higher risk of liquefaction and ground movement during earthquakes. Banks may require additional assessments, such as geotechnical reports, to evaluate the property’s stability and level of risk.
A bank may consider the market demand, property value trends and economic predictions. A typical example is mortgages on new apartments; banks are wary of oversupply or uncertain demand for apartments in an area.
3 Loan-to-Value Ratio (LVR):
Banks require a professional property valuation to determine its current market value. It is standard to require a 20% deposit for an owner-occupied mortgage. A Loan-to-Value (LVR) over 80%: is considered riskier, especially if maintenance is needed. So, if an applicant falls in love with a house and their deposit will be less than 20%, the bank will require a valuation to help them manage their risk. If the applicant offers over the registered valuation figure, they will potentially need to increase their deposit to match the maximum lending the bank is offering.
4 Legal and financial factors:
Banks review the property’s title to ensure there are no encumbrances, restrictions, or legal issues. For cross-lease properties they will want to check that the flats’ plan is valid.
LIM & PIM Report
The LIM (Land Information Memorandum) report details information relating to the land, including information about rubbish collection, hazards and services. To find out about the buildings and consents you need to get the PIM (Property Information Memorandum) or sometimes known as the Property Envelope. If any buildings or alterations are unconsented or non-compliant, they can impact the property’s insurance coverage and be costly to rectify.
Banks will only approve a mortgage on a property if it is adequately insured. A property considered high risk will have high premiums or may not be insurable at all. Just because the property is currently insured does not mean that you are guaranteed to get continuation of cover.
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Before heading out the door to shop for a house, contact us to arrange mortgage pre-approval. You will then know how much you can borrow and be ready to find a home!