How to Match Your Home Loan to the Property You Buy

The type of property you buy can change how a lender assesses your home loan. A house, a unit, a townhouse and a new build can each lead to different questions, so it pays to check before you sign a contract.

If you live in Brisbane and are weighing up what to buy, this article is for you. It covers what lenders look at, how building differs from buying, and how a loan structure can change your repayments.

Why Does Property Type Matter for a Home Loan?

Lenders lend against the property as well as against you, so the type of property can affect how your application is assessed. The property is the security for the loan, and the lender wants to be comfortable it holds its value.

In practice, a lender may ask different questions about a freestanding house than about an apartment in a large complex. Policies differ between lenders, which is why one lender may be comfortable with a property that another is not. A broker can compare options from the lenders on their panel before you commit to a purchase.

House, Unit or Townhouse: What Lenders Look At

Lenders look at the property's size, location, condition and how easy it would be to sell, and these factors can differ between houses, units and townhouses. Each lender sets its own rules, so the same property can be treated differently from one lender to the next.

For units and townhouses, lenders may also look at the building or complex, such as how it is managed and what the body corporate arrangements are. For a house, the focus is often on the land and the condition of the home.

These checks can affect the loan to value ratio (LVR) a lender will accept. If your deposit is under 20% of the property's value, Lenders Mortgage Insurance (LMI) may apply. The trade-off is that LMI is an added cost, which is usually added to your loan amount or paid upfront. Your lender or broker can explain how it would apply to your situation.

If you are saving for a first home loan, the first home buyer loans page explains the pathways that may suit you. The borrowing capacity page is a good starting point for working out what you may be able to borrow.

Building a Home: How Construction Loans Work

A construction loan typically releases money in stages as your build progresses, rather than as one lump sum at settlement. This is different from buying an existing home, where the full loan amount is paid when the sale settles.

That staged structure means your repayments usually start small and grow as more funds are drawn. The trade-off is that you will need to manage costs carefully during the build, and delays can add pressure. Our first home buyer construction loans page covers how this works for buyers building their first home.

Interest Only vs Principal and Interest on an Investment Unit

Interest only repayments are lower than principal and interest repayments in the early years, but you are not reducing the loan during that time. Interest only terms are usually for a set period, after which repayments switch to principal and interest and rise.

As an example, consider a buyer who borrows $500,000 to buy an investment unit. We will use an illustrative rate of 6.75% p.a. and a 30 year term for both options.

• Principal and interest from day one: about $3,243 a month.
• Interest only for 5 years: about $2,813 a month, and the balance stays at $500,000.
• Then principal and interest over the remaining 25 years: about $3,454 a month.

The buyer's outcome is about $430 a month of breathing room for five years. After that, repayments are about $211 a month higher than if they had started with principal and interest, and no part of the loan has been repaid. Interest only usually costs more over the life of the loan. In this example it is about $37,600 more in interest, even at the same rate. Lenders also often charge a higher rate for interest only loans, so the real gap could be larger. For someone planning to invest in property, the lower early repayments can be a reasonable trade, but it suits only those who can handle the later jump and accept the higher total cost. Tax treatment depends on your circumstances, so speak with your accountant. You can test your own figures when calculating home loan repayments using our mortgage repayment calculator.

If you are an owner occupied buyer, a principal and interest loan is more common, because the aim is usually to pay the home off. An offset account linked to a variable rate loan can reduce the interest you pay on the balance. The trade-off is that these loans can come with higher fees or a different rate than basic loans, so compare the full cost.

How to Check a Property Before You Apply

The best time to check a property is before you make an offer, and the best way is to speak with your broker about the specific address. A home loan pre-approval shows what you may be able to borrow, but it does not confirm that a lender will accept every property.

You can use a property report to learn more about a property before you commit. If you are buying a unit or townhouse in Brisbane, ask your broker how your chosen lender treats that property type before you sign. If you are comparing a few different homes, such as a house in one suburb and a unit in another, your broker can check each one against lender policy.

If you are not sure which loan suits you, the loan scenarios page shows how we approach different situations.

Call one of our team or book an appointment at a time that works for you. We will talk through the property you have in mind and help you find a loan that fits it.

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