Boarding House Mortgage

How much can I borrow?

Banks may assess a boarding house as either being a residential property or a commercial property.

• 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?

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.

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!

Tenant risk

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.

Even though the bank may sometimes class them as a commercial property, they’re a lot different to running a bed and breakfast or a hotel.

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:

• Tourists.
• 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.