How a Postcode Can Prevent You From Getting A Property Loan

Did you know that a postcode could be the difference between a lender offering or denying you a loan?

How do postcode restrictions affect your ability to borrow?

Behind every decision to lend money, banks and financial institutions have specific sets of criteria that must be satisfied. The postcode of the property you intend to purchase plays a part in whether you'll get a loan - or not.

Here’s what you need to know:

Each lender and Lenders Mortgage Insurance (LMI) provider is informed by a guide that assigns a category for every postcode across Australia.

These are the six main categories:

Metro Plus: Established properties in sought-after metropolitan locations. Very low risk.
Category 1: Metropolitan areas, as well as capital cities and major regional centres with large populations in each state are in this category. The grouping is considered low risk.
Category 2: This applies to medium-sized regional centres that are classified as low to medium risk.
Category 3: Fluctuating property markets in smaller towns are classed as medium to high risk.
No Category / National Locations: Properties in this grouping are considered very high risk. It’s all other postcodes across Australia that aren’t included in the other categories already listed above.
High-density: Inner-city suburbs or areas with high-rise residential buildings are also considered high risk, despite their central location.

But wait, it gets more complicated. Different lenders classify risk depending on their own interpretation of the local property market in each postcode.

Some factor in historical sales data. This explains why properties in less populated locations take so long to sell. Properties that are listed for sale and don’t sell for long periods contribute a higher risk profile. And that’s a no-go for most lenders.

"You will find that most banks will just decline a deal in an area where a valuation has been completed but there is no sales evidence within the last 6 months," says Compare Club Head of Home Loans Anthony Stevenson.

"This will happen regardless of the postcode restriction but you will find that most of those areas are included on the bank's individual restrictions to not waste the valuation in the first place."

The bottom line

Yes, there are bargains to be had in rural and remote areas, but only if you’re in it for the long-term and are happy to sit back and wait for the area to improve or become more popular – and even that’s not guaranteed.

Cash buyers who can afford to splash out for a block of land in a hidden location, and also have the cash to pay for the new build or renovation, don’t need to worry about postcode restrictions.

For everyone else though, understanding that banks might not lend you any money is a fast way to put any country renovations and building projects off the table, because you won’t be able to borrow the money to fund your dream.

Go deeper: Home loans explained

Financial disclaimer The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.