Apartments are a very tempting purchase, especially for first-home buyers. They tend to cost less and therefore be much more within reach. And you can pretend you’re living in Manhattan, à la Friends or Seinfield or Sex and the City, whichever 90’s show you prefer. But before you start planning a reenactment of “The One with the Proposal” with your partner in your new apartment, there are a few things to be aware of.
If you’re looking to borrow up to 80% on an apartment, most banks prefer them to be at least 50sqm. Two banks will allow as low as 40sqm and one bank will include the balcony in that size. In general though, <50sqm is going to be more difficult to finance.
Freehold is the most common form of ownership for apartments. You own your unit and, collectively, you and the other unit owners own the land underneath. The main costs for freehold units are rates and body corporate fees.
A leasehold apartment buys the unit but not the land. You lease the land off another owner so there is always a lease payment called “ground rent” in addition to the ownership. This is what makes leasehold units appear to be so cheap. It’s as if you are buying a shell that dangles 5 or so stories in the air. The problem is that the lease eventually needs to be renewed and when it does, the cost can skyrocket. As an example, Auckland’s Scene Three apartment build went from $1,200 per annum to $8,000 in 2012. In general, leasehold apartments are for the perpetual high-income, low-deposit buyer as they can keep up with lease expenses increasing over time. It would be fair to say banks much prefer freehold.
The main costs for leasehold units are rates, body corporate fees and ground rent.
Typically a bank will want a buyer to have the mortgage repaid before the rent renews. That way, they will not be exposed if the rent jumps up significantly.
As an example, if the leasehold has just renewed and is fixed for 7 years, a bank will allow a buyer to purchase with a 7 year mortgage maximum term. This can make a finding a cashflow positive leasehold property challenging unless the lease is for a longer period and/or just renewed.
As the name suggests, a company share ownership means you own shares in a company that owns property. If, for example, there are 10 equal sized units, all valued exactly the same, you would purchase 10% of the company. In reality, the purchase looks very similar to a standard apartment.
Because of the ownership style, it is common for company share apartments to not allow rental tenancies in the building. If you are purchasing as an investment property, you will need to check the rules of the company. You should also bear this in mind if you need to sell quickly or in a quiet market. The market to purchase a company share unit is thinner than freehold units because the buyer must be an owner-occupier.
It is possible to borrow up to 75% of a Company Share purchase although most mainstream banks lend around 65%-70%. All other factors remain the same (requirements for income etc).
A dual-key apartment refers to the layout of a particular unit. Typically these are one legal unit (usually on a freehold title) but the layout is two apartments. The name refers to the fact that there are two separate entrances (dual-key) on one title.
Dual-keys tend to have better cash flow than the equivalent single apartment as two smaller units rent for more in total than one larger unit. However, they are slightly harder to raise a mortgage on. Banks have been known to ask for as much as a 40% deposit. The reason for this is that they only appeal to a small group of buyers; it’s not suitable for small families etc. If the bank has to sell under mortgagee conditions, it may be harder to find a buyer. If you are looking to buy a dual-key as an investment, consider whether you are looking for a cash flow positive property (in which case they may be a great option) or for maximum capital gains (in which case it may not be the option for you).
The bank will need to know what the body corporate payments are and factor this into your budget. Don’t be afraid of these costs. You pay a Body Corporate to maintain the outside of your building and insure your property. You were going to have to do this on a house too (replace the roof occasionally, paint the walls etc), it’s just that most people don’t put aside the money in the same way a body corporate does.
Banks are generally against lending higher than 80% on an apartment. This is because, if they have to sell the property from under you, there are often one or two identical apartments for sale which lowers the chance of them getting a good price.
Consider what this means for a first home buyer though. You can often borrow up to 90% on a house but only 80% on an apartment. This means, if you have a $100,000 deposit (and plenty of income), you could buy a $1,000,000 home but only a $500,000 apartment. While an apartment is cheaper (try finding a $500,000 home in Auckland!) your buying power is considerably less.
It’s a new world with companies like Uber and Lyft springing up everywhere. There is no requirement from the banks to have a carpark and it doesn’t affect the maximum you can borrow.
Despite that, an apartment with a carpark attached does appeal to a wider range of buyers. If you are looking to sell in the future, a carpark will likely mean more offers.
Typically upper level apartments attract a premium price. There are a couple of reasons for this – noise from the street is reduced, views are potentially better and the apartment may get more sun (as not blocked by other buildings).
If you are purchasing to live in, you will have to weigh up the cost versus emotional benefits. Is it better to pay an extra $100k for more sunshine and less noise? If you are purchasing as an investment, the decision could be more of a yield decision. Is an extra $100k going to get an extra $5k per year ($100 per week) in rent? It might only get you another $50 per week, in which case the cheaper apartment may be a better option.
If you’re not a fan of DIY, apartments might be the purchase for you. The body corporate is usually reasonable for the maintenance of the halls, public areas and the exterior.
Apartment owners enjoy levels of security far higher than standard houses. Locks on the front door, occasionally an in-house manager, lifts with keypads and neighbours in close proximity. The height of most apartments makes them hard to enter from the outside. If security is of high concern to you, apartments should give you more comfort than a standard home.
Units are typically smaller than houses and the concrete between floors acts as a great insulator. Although there are exceptions, apartments tend to be cheaper to heat than houses.
Obviously, if you put enough people together, the building is only as quiet as your noisiest neighbour. A party on Friday night can keep all surrounding people awake. However some ownership structures such as company share apartments means less renters in the business. This means more accountability for bad behaviour.
Some apartments have great sound proofing, others are poorly designed. If you are a light sleeper and planning to live in the apartment, it may pay to check sound proofing.
Some apartments are being built with green roofs, courtyards and outdoor areas. But in general, they have less room than a typical house. This is fine for some families but if you are used to a more room, they can take some getting used to.
Apartments are not for everyone but if you are looking for an apartment, run a few examples past your mortgage adviser first to get an idea of what the banks think.
It’s not always easy to get started. What do you need to know?
We’ve put together the most important things to know when you’re looking at buying your next Investment Property and we are giving it away for free.
Mortgage Lab’s mission is to be the digital town square for financial decision-makers to gain knowledge about their current and future mortgage. Follow us on Facebook and LinkedIn or subscribe to our newsletter to be notified of our latest articles.