Can you finance an uninhabitable property?

Finance , Property Sep 4, 2023

4 min read

Liveable kitchen
Liveable kitchen

Will lenders finance property that is uninhabitable (also known as unliveable)? This is a really interesting question and not one we get very often – we probably see maybe 2-3 of these a year. In short, yes… though you know there is going to be a “but”.

Sometimes a client will be buying a property to knock-down with the intention of building new on the land. In this situation a building contract will need to be in place with a qualified builder, and the finance will be in the form of a construction loan with appropriate draw downs as per the usual building process. The risk to the lender is much lower, as they are only paying out when the stages of construction are complete and the full loan is not drawn down until the construction is fully completed.

Other times, a client will be buying a property with the intention of renovating it but don’t want to go through the process of organising a construction loan. In these situations, a lender may offer the loan with the proviso that the client get a building quote and prove they have enough cash to complete the repairs and/or renovations with a qualified builder in order to make the property habitable.

If the property is uninhabitable and the client is relying on funds from the lender via a standard mortgage, then the likelihood of the loan being approved is very low. What the lender doesn’t want to happen, is for a partial renovation to be completed, the owner to run out of money to complete the project and be forced to sell – the concern here is the property won’t sell and the lender will find themselves with an unpaid loan and an unsellable property.

How do you know if a property you’re looking at is uninhabitable?

Uninhabitable basically means the average person can’t live in it. This could be that it doesn’t have access to essential services like water, sewerage or power or isn’t watertight i.e. have a roof, walls and sealed windows. There might be no or an incomplete bathroom, kitchen, flooring or walls. Or a renovation that has only been partially completed, leaving important elements missing like heating or cooling.

We’ve attached two pictures here, the first (the kitchen) is deemed habitable and while it’s not pretty, you can see that it is functional. Whereas the second (the bathroom) is not owing to the fact that it’s basically an empty room. With building costs and interest rates having risen, we wonder whether we will start to see more of this type of purchase? People buying half finished property and finishing the works where the original owner could not.

We’ve assisted a handful of clients of the years who have targeted property based on its location within a particular suburb, despite the fact that the property itself is a little worse for wear. In these instances, the real value of the purchase is in the land and not the building on it.

As you can see, buying an uninhabitable property is possible, however you need to seriously consider the viability of the project before you commit. If you have a pre-approval in place, you’ll also need to speak with your broker ahead of time if you think the property you are keen on might be unliveable so that they can check first with the lender before you make an offer.