Will banks approve a boarding house mortgage?
Boarding houses can be a great way to earn a good rental income from multiple tenants and give you a roof over your head.
In most cases, a boarding or lodging house has up to 5 or 6 bedrooms that are rented out separately and another room for you to live in separately.
The trick to borrowing the amount you need for a boarding house mortgage depends on how the bank assesses the property.
Boarding house mortgage: how to get approved
Getting a boarding house mortgage is a little different to getting approved for a typical investment loan.
The reason is that the bank may assess the boarding house as either being a residential property or a commercial property.
This can have a huge difference in your ability to get approved and how much you can borrow.
How much can I borrow?
Boarding house mortgage applications are generally treated the same as a standard residential home loan.
- Standard home: Borrow up to 95% of the purchase price or Loan to Value Ratio (LVR).
- Standard home being used as a boarding house: 70% LVR. Borrow more depending on the strength of your case.
- Commercial loan: 60-70% LVR. Typically for boarding houses with 6 or more bedrooms.
Please call us on 1300 889 743 or complete our free assessment form to speak with one of our mortgage brokers about the rooming house you’re looking to buy.
Is the boarding house currently being used as a standard home?
Some lenders may limit you to borrowing a maximum of 80% of the purchase price for a boarding house with 5 bedrooms, even if it is currently being used as a standard home!
Luckily, one of our lenders will allow you to borrow up to 95% of the purchase price (including the cost of Lenders Mortgage Insurance) if the boarding house is currently being a used as a home.
What if I want to use the boarding house as an investment property?
If you plan to actually use the property as a boarding house, lenders will typically be more restrictive with LVR on a boarding house mortgage if more than 51% of the property will be used to generate income.
The loan may also fall under commercial lending and you’ll up for higher interest rates.
However, that means if the boarding house has 5 bedrooms and the property can be used as a residential property, you could potentially rent out just two of the rooms and still be able to borrow up to 95% of the property value.
That’s because less than half of the property is being used to produce income.
This is also a great way for families to earn extra income on the side.
Is the boarding house purpose-built?
If you’re buying a property that is currently being used as a boarding house and is purpose-built, you’ll generally need to go through business lending or the commercial arm of a bank to get approved.
Purpose-built generally means it can’t be easily reverted back to a residential property if need be.
The reason is that the boarding house doesn’t have wide market appeal, which is crucial if the bank ever needs to sell the property in the event you default on your mortgage.
The bank will also need to work out if you’re relying solely on rental income to repay the mortgage (rather than also being employed), in which case they’ll want to know if you’ve had success in running a similar operation in the past.
This includes asking to see a business plan and forecasting.
Commercial loans also come with higher interest rates than a typical residential loan.
What about the size of each room?
Apart from the number of rooms in the boarding house, banks may also restrict the amount you can borrow depending on the size of each room.
If the rooms are less than 40m2, you may be restricted to borrowing 80% of the value of each room or unit.
However, if the rooming house is considerably large, each room may be more than 40m2, in which case you can borrow up to 90% of the property or more if you’re in a strong financial position.
You can find out more information on how banks assess unit sizes on the studio apartment home loan page.
How many rooms are there?
Banks are generally more flexible with a boarding house mortgage if the property has 6 rooms or less but what if you’re dealing with a larger rooming house?
Some developers build boarding houses with 10, 20 or even 30 individual rooms.
In these cases, the developer owns the building and there isn’t a corporation in place to handle maintenance of common areas and insurance of the buildings.
If the the property itself is not a strata title, the banks will assess the boarding house mortgage as multiple units on one title.
Banks are conservative when it comes to multiple units on one title because, again, there is a really small market of investors interested in these types of properties.
As a result, you’ll generally be restricted to borrowing up to 70% of the property value with a commercial loan.
Will the bank use projected rental income?
If you’re plan is to continue running the property as a boarding house, the bank will generally accept 80% of your proposed rental income when assessing your ability to make mortgage repayments.
This is otherwise known as your serviceability for a boarding house mortgage.
So for a boarding house with 3 large bedrooms charging $200 a week in rent and 2 small bedrooms at $150 a week, the actual rental income would be $900 a week.
The market rent if the property was rented as a standard house with 5 bedrooms would be around $560.
A residential lender will use $560 a week rent in their assessment even if the property is currently generating $900 a week.
They will then use 80% of $560 a week, or $448, to allow for costs such as a property manager, council rates, water rates, insurance and repairs.
Although most banks are strict with the 80% rule, one of our lenders will actually use up to 100% of the proposed rental income for a boarding house!
What if it’s a commercial boarding house?
A commercial lender may only use up to 60% of proposed rental income but they may also go up to 100%.
Getting the loan you need with business banking comes down to presenting a strong case.
Speak to a mortgage broker so they can assess your investment plans and line you up with a boarding house mortgage that meets your needs.
Call us on 1300 889 743 or complete our free assessment form today!
Boarding houses are usually located in low socioeconomic areas and attract tenants and families who earn low incomes or are otherwise in long-term financial hardship due to any number of reasons.
Because of this, there is a risk in the type of clients you are likely to attract and whether they can be relied upon to pay their rent in full and on time.
There may also be associated risks with potential damage to the property and respecting other rules you’ve set up for the property.
In terms of getting approved for a boarding house mortgage though, banks will only take into account whether the property is what they refer to as ‘Metro Plus’ or ‘Category 1’ locations.
These categories are metro and city areas or major regional centres and are generally seen as a lower risk.
Boarding houses outside of these locations may be considered on a case by case basis.
You can find out more information on the postcode location guide page and which lenders don’t have location restrictions at all.
What are boarding houses?
A boarding house is the same as buying any other rental property in many ways.
The only difference is that you’re renting out individual rooms instead of an entire property to one tenant or a unit/apartment in a strata arrangement.
How is a boarding house different to a B&B or a hotel?
Boarding houses are sometimes call lodging houses or rooming houses and, at a basic level, they provide residents with a principal place of residence (PPR) for a fee.
Unlike a typical rental property though, boarding house tenants don’t have the same control over the premises.
Generally speaking, residents only have a right to occupy a room and to share other facilities such as a kitchen, lounge areas, the grounds around the property, toilets and other living areas.
This differs to a share house as well in that each occupant only had exclusive possession of their room.
In addition, there aren’t generally meals and services provided such as laundry and cleaning, which differs greatly from bed and breakfast inns, hotels and motels.
A backpacker accommodation is probably closer to what is considered to be a boarding house but backpacker generally have more rooms and accommodate short-stay guests.
Plus, they’re almost always assessed as a commercial deal.
The best part about a boarding house is that:
- Residential home loans and competitive interest rates and loan terms are available.
- You can earn rental income from your tenants.
- You can live in the property as well.
Is a boarding house right for me?
If you’re planning on occupying one of the rooms, it’s safe to say that these type of properties aren’t good for people with large families.
They’re generally isn’t enough room to live because rooms are generally limited to 4 people or less.
However, for single people and couples wanting to get their foot into property market and earn rental income while doing it, a boarding house mortgage may be something to consider.
The other thing to keep in mind is that unlike buying a standard residential home or unit as an investment property, you have to manage at least 5 or 6 tenants or more, depending on the size of the boarding house.
That means making sure they’re paying their rent on time and they’re respecting the property.
The more tenants, the higher the risk to you and, generally, the more legal requirements you have to adhere to, not to mention the cost of insurance it’s recommended you sign up to.
Who uses boarding houses?
Your tenants will typically be:
- Students (student accommodation).
- People who are unemployed and earning Centrelink benefits due to disability, for instance.
- Newly-arrived immigrants try to make a start in another country.
- The elderly.
Don’t the elderly have special needs?
Yes, some elderly and disabled people do have special needs and require support or supervision with daily tasks and personal care such as showering, preparing meals or managing medication.
These so-called ‘assisted’ boarding houses are licensed by the ageing, disability and home care, and family and community services departments of your relevant state.
Depending on the nature of the property, it may be considered a purpose-built and the bank may not accept it as security or may restrict the amount you can borrow.
In saying that, there are many elderly Australians that seek out boarding house accommodation and are not in need of constant care.
They don’t need to be in an aged care facility and often choose to stay in boarding or rooming houses because it’s cheaper and they simply want some company.
Do your due diligence on tenants
If the property is in a low socioeconomic area, you’re likely to attract bad tenants.
Many of these tenants are likely to miss rent and there is also a higher chance of damage to the property.
Like a bank, you should be weighing up the risks of potential tenants and whether they’re in a position to pay their rent for the foreseeable future.
You should also be wary of newly-arrived migrants.
There are fines and gaol time for housing illegal immigrants so be sure to check ID carefully for all new tenants.
Boarding house mortgage FAQs
What else do I need to know about getting a home loan to buy a boarding house?
Are there laws and regulations I should know about?
If you really want to buy a boarding house, you should make yourself familiar with the standards for lodging rooms for your state’s department of human services.
The Boarding Houses Act 2012, for instance, was introduced in New South Wales a few years ago to improve minimum standards for a boarding house property as well as rights for tenants.
- Local councils have wide-ranging inspection powers to ensure the boarding house is meeting minimum standards.
- Residents cannot simply be evicted without notice or right of appeal.
- Each state has their own publicly available register for boarding houses. Those that don’t meet standards aren’t registered and shouldn’t be operating.
As an example, the Victorian Department of Human Services requires that:
- The premises be in a reasonably clean condition including fixtures, furniture and other household equipment like microwaves and washing machines.
- This is also an OH&S requirement from a safety and hygiene perspective.
- Owners must provide 24 hour access for residents to their room and bathroom facilities.
- A resident’s privacy cannot be unreasonably restricted or interfered with by the property owners.
- Owners must give at least 24 hours notice before entering a resident’s room.
There are other rules regarding a tenant’s rights and your responsibilities as an owner.
Check out the ‘Minimum standards in rooming houses’ page on the Consumer Affairs Victoria website for more important information.
Are boarding houses seasonal?
Tenancy rates for boarding houses aren’t seasonal like a hotel.
That’s an excellent investment feature, not to mention the fact that you’re not necessarily trying to attract weekend guests and tourists for a short-term stay (although you could that too if you have a room available).
Tenants will stay long-term if they feel they are safe and secure in the building, that the cost of rent is consistent and that their overall rights as residents are being respected.
What should I look for in a boarding house business?
If you’re looking at buying a boarding house that is considered as a commercial property, ask the vendor for an income and expenses sheet.
The cost of running a boarding house can be higher than owning a standard investment property because there are essentially more people in the building.
A higher number of people means more expensive insurance and costs needed for maintenance and repair.
The boarding house should also be in good condition to meet state laws and also have development approval (DA) from the council to operate as a lodging house.
Without DA approval, you cannot operate as a boarding house.
Is there Government support for providing social housing?
There are tens of thousands of people on waiting list for boarding houses across Australia and the government recognises this.
A number of state governments offer support in the form of grants for the construction of new, self-contained boarding house accommodation.
The NSW government, for instance, offers up to $10,000 per room for developing a new site.
If you plan to construct a boarding house or convert an existing residential property into a boarding house, speak with your local council about the incentives that may be available to you.
Please see the construction loan page for information about how banks assess applications for finance.
Alternatively, complete our free assessment form and we can tell you how we can help you get a boarding house mortgage to construct or renovate.
Do you want to get a boarding house loan?
Our mortgage brokers have many years of credit experience and we’re specialists in investment loans.
If your goal is to reap the investment rewards of owning a rooming house, we can build a strong case with the right lender so you have a strong chance of getting approved for a boarding house mortgage.
Please call us on 1300 889 743 or complete our free assessment form to discover how we can help you.