While you might love the location of your next property, some lenders might not be quite so keen. As a result, you may find it harder to get your home loan application approved or you might need to stump up for a bigger deposit.

But why does location matter when it comes to home loans?

Why lenders care about postcodes

Most lenders don’t like risk, so they limit their exposure to it as much as possible. So, when you apply for a home loan, lenders assess your application to see how much risk it poses. They will look at your financial circumstances and credit history; how much you want to borrow; and the property you want to buy.

As part of this, lenders consider how likely it is that they can sell the property and get their money back should you default on your loan. And this is where location comes in.

Many lenders put postcodes into different risk categories based on how they view the local property market and economy.

What counts as a ‘risky’ location?

Each lender judges a postcode differently, so the rules aren’t set in stone. But some of the things they can consider include:

• Population – Smaller towns may have slow-moving property markets as there may be less demand for property.

• The local economy – High unemployment rates and a weak local economy can also count against an area. Some lenders are also cautious if an area relies on a single industry, such as mining. That’s because local real estate values and rental returns are typically tied to the industry’s fortunes.

• Over-supply issues – Over the past decade, some city suburbs have seen an increasing number of new apartment blocks built. While this isn’t a problem if there are enough buyers, sometimes supply outstrips demand. This can cause values to fall. Additionally, some lenders look to limit their exposure by capping the number of home loans they’ll approve in a single development.

• Natural disasters – Some areas are prone to natural disasters, such as bushfires, floods and landslides, which can damage or destroy property.

What happens if you want to buy in a high-risk area?

In many cases, lenders use postcode risk categories to determine their lending policies for particular areas. If they think it’s very high-risk, they may reduce their maximum loan-to-value (LVR) ratio or, sometimes, won’t lend to you at all.

An LVR is the percentage of money you can borrow compared to the value of a property.

For example, if you want to borrow $450,000 to buy a home valued at $500,000 you’ll need a loan with an LVR of 90% (450,000 ÷ $500,000 x 100).

But if the property is in a risky location, a lender might be willing to offer you a loan with an maximum LVR of only 70%. The maximum amount you could borrow would then be $350,000 – so you would need a larger deposit to get approved.

Heart set on a particular location?

If you’re not willing to budge on location or you just want some surety that the property you’ve got your heart set on will be acceptable for us, it can be a good idea to chat to us before making a home loan application.