Lenders assess your property before they assess you. The type of property you're buying determines which loan products are available, what deposit you'll need, and whether you'll pay a higher interest rate or require a specialist lender.
How lenders categorise property types
Lenders group properties into categories based on risk, and each category has different lending rules. Standard residential properties including detached houses, townhouses, and apartments in established buildings typically qualify for the widest range of loan products and the lowest rates. Properties that fall outside this category, such as serviced apartments, properties on large acreage, or units in buildings with known defects, face additional lending restrictions or higher rates.
Consider a buyer purchasing a two-bedroom apartment in an established building in Doncaster. The property is classified as standard residential security, which means the buyer can access variable rate, fixed rate, and split loan options from most major lenders. They qualify for a loan with a standard deposit of 10%, and because the property falls within the Australian Government 5% Deposit Scheme price cap of $950,000 for capital cities in Victoria, they could potentially use that scheme if they're a first home buyer. The lender values the property at $680,000, the buyer provides a 10% deposit, and the loan settles without requiring lenders mortgage insurance because the combined deposit and government guarantee reach 20%.
If that same buyer were purchasing a studio apartment in the same suburb with a floor area of 38 square metres, the lender may classify it as non-standard security. Some lenders won't offer loans on apartments smaller than 40 or 50 square metres. Others will lend but require a larger deposit, often 20% instead of 10%, and may apply a higher interest rate or exclude certain loan features such as offset accounts.
Owner-occupied loans and investment loans across property types
Whether you're buying to live in or to lease out affects both your interest rate and your borrowing capacity. Owner-occupied home loans typically attract lower interest rates than investment loans, and lenders apply different serviceability tests depending on how you intend to use the property.
For owner-occupied purchases of standard residential property, lenders assess your income against your living expenses and existing debts, then calculate how much you can borrow. For investment loans, lenders often apply a rental income shading of 70% to 80%, meaning they only count a portion of the expected rental income when calculating serviceability. If the property type is considered higher risk, such as a rural property on acreage over two hectares, lenders may further reduce the loan-to-value ratio or decline the application altogether unless you can provide a deposit of 30% or more.
Apartments, townhouses, and strata title considerations
Properties sold with a strata title, including apartments and townhouses, require lenders to assess not just the individual unit but the entire building or complex. Lenders review the strata report to check for upcoming major works, the financial health of the owners corporation, and whether the building has any structural issues or cladding concerns.
A buyer looking at a three-bedroom townhouse in Ringwood might find that one lender approves the loan without issue while another declines it after reviewing the strata report. If the owners corporation has insufficient funds in the sinking fund, or if there's a scheduled levy for roof repairs, some lenders will either reduce the amount they're willing to lend or require a larger deposit. Others may approve the loan but apply a higher interest rate to account for the additional risk.
In our experience, buyers purchasing apartments or townhouses should request a copy of the strata report early in the process so a broker can flag any potential issues before making a formal home loan application. This allows time to approach lenders who are more comfortable with the specific building or to adjust the deposit if needed.
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Properties that require specialist lenders
Certain property types fall outside the lending criteria of major banks and require a specialist lender. These include properties with commercial components such as a shop front on the ground floor, properties classified as company title rather than strata or torrens title, and properties in buildings with fewer than four units where defects or cladding issues are present.
Serviced apartments, even if located in a major city and used for owner-occupation, are often treated as commercial property by lenders. This means the buyer may need a deposit of at least 30%, and the loan will be structured as a commercial loan rather than a residential home loan. Interest rates on commercial loans are typically higher, and features such as offset accounts and refinancing flexibility may be more limited.
Rural properties, defined by most lenders as parcels of land larger than two hectares, also attract different lending criteria. Some lenders will only offer loans on rural properties if the land is used for residential purposes and not for farming or business activity. Others will lend on hobby farms but require a larger deposit and may exclude certain loan features.
How deposit size and LMI vary by property type
The deposit you need depends on both the property type and the lender's assessment of risk. For standard residential properties, you can often borrow up to 95% of the property value if you're an owner-occupier, though you'll pay lenders mortgage insurance on any loan above 80% LVR. For property types considered higher risk, lenders reduce the maximum LVR, which means you'll need a larger deposit even if you're prepared to pay LMI.
Properties such as apartments with a floor area below 50 square metres, properties in regional or remote locations, or properties identified as having building defects may be capped at 80% or 90% LVR depending on the lender. Some lenders exclude these properties from LMI altogether, meaning you must provide at least a 20% deposit regardless of your income or credit history.
If you're using the Australian Government 5% Deposit Scheme, the property must be classified as a residential dwelling and fall within the applicable price cap for your location. Properties that don't meet the standard residential definition, such as serviced apartments or properties with commercial use, are excluded from the scheme even if the purchase price is below the cap.
Matching loan features to your property and purpose
Once you know your property type and how lenders will assess it, you can match the right loan structure to your situation. Variable rate loans offer flexibility with features such as offset accounts, additional repayments, and redraw facilities. Fixed interest rate home loans provide certainty over repayments for a set period, typically one to five years, but often come with restrictions on additional repayments and may not include an offset account.
A split loan, where part of the balance is fixed and part is variable, allows you to manage interest rate risk while retaining access to flexible features on the variable portion. This structure works well for buyers purchasing standard residential property who want to build equity through additional repayments while protecting a portion of the loan from rate rises.
For investment properties, an offset account linked to a variable rate loan allows you to reduce the interest you pay without making additional repayments, which preserves your tax deduction. Interest-only loans, where you only pay the interest component for a set period, can improve cash flow in the early years of ownership, though you won't build equity during the interest-only period unless the property value increases.
How location and zoning affect lending
Lenders also assess where the property is located and how it's zoned. Properties in metropolitan Melbourne generally qualify for the full range of home loan products, while properties in regional or remote areas may face additional restrictions. Some lenders set postcode limits, meaning they won't lend in certain areas regardless of the property type.
Zoning affects lending when a property is in an area designated for future development or when the current use doesn't match the zoning. A residential property on land zoned for industrial use, or a property in a flood zone or bushfire-prone area, may require additional insurance or a larger deposit. Lenders review council zoning certificates and may decline applications if the zoning presents a risk to the property's future value.
If you're buying in an area with known environmental risks, such as coastal erosion or land slippage, expect lenders to request additional reports or apply stricter lending criteria. In these cases, working with a broker who understands which lenders are active in the area can make the difference between approval and decline.
The property type you're buying shapes every part of your loan structure, from the deposit and interest rate to the features and lenders available to you. Knowing how lenders assess your property lets you prepare the right documentation, choose the right loan product, and avoid delays at settlement. Call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
Do lenders charge higher interest rates for apartments than houses?
Not always. Standard apartments in established buildings typically qualify for the same rates as houses. However, apartments below 50 square metres, in buildings with defects, or with other non-standard features may attract higher rates or require specialist lenders.
Can I use the Australian Government 5% Deposit Scheme for any property type?
The scheme applies to residential dwellings that meet the lender's standard security criteria and fall within the price cap for your location. Properties with commercial use, serviced apartments, and some non-standard properties are excluded even if the price is below the cap.
What deposit do I need for a rural property or a property on acreage?
Most lenders require at least 20% to 30% deposit for rural properties or land parcels over two hectares. Some lenders exclude these properties altogether, while others will lend but apply stricter criteria and higher rates.
How does property type affect my borrowing capacity?
Lenders reduce the maximum loan-to-value ratio for higher-risk property types, meaning you'll need a larger deposit. They may also apply stricter serviceability tests or exclude certain features, which can reduce the amount you can borrow.
Do investment loans and owner-occupied loans have different property requirements?
The property type criteria are generally the same, but investment loans attract higher interest rates and lenders apply rental income shading when assessing serviceability. Some lenders also reduce the maximum LVR for investment purchases of non-standard property types.
