Loan pre-approvals by banks can be confusing. They aren't a rubber stamp to buy whatever you want, but some buyers are being a little too cautious.
What's in a Title?
Australia is the great innovator in the world of property ownership. It was a South Australian, Robert Torrens, who introduced the modern Torrens Title system in his home state in 1857, a system now used across much of the world today. Torrens Title is an elegantly simple concept: all properties are recorded in a land register maintained by the government, and changes in ownership are recorded in the register. It replaced the antiquated system of a physical and often ancient document known as the ‘title deeds’ being updated each time a transaction occurred – thereby creating a ‘chain of title’ – and being passed from owner to owner. In the cumbersome pre-Torrens system, the whole ‘chain of title’ needed to be checked every time there was a transfer to a new owner.
Australia also developed strata title law first, in the 1960s. New South Wales was the leader on this occasion. Strata title legislation underpins the sub-division of most apartment blocks in Australia, allowing individuals to own the portion of the block they reside in whilst having a shared ownership of and responsibility for common areas such as external structures, stairways, hallways and the land the building resides on.
These two legislative developments – around a hundred year apart – epitomises the Australian egalitarian spirit of ‘a fair go.’ By simplifying title rules, they made it easier for Australians to own, trade and subdivide property, which enabled more of us to become landowners.
In a testament to the confidence in which the modern titles system is held, banks routinely lend individuals 90%, 95% and sometimes 100% of a property’s value, effectively based on an ownership entry on a database in the state or territory’s land registry IT system.
But the 1960s isn’t actually that long ago and blocks of apartments began to appear on the landscape from the 1920s and 1930s. So you won’t be surprised that there are some older apartment blocks with title documents that pre-date the strata title system.
When owners of early apartment blocks considered how they could sub-divide and sell individual units, they turned to corporation law for a solution. A company was established which became the registered owner of the property. Unit owners were then sold shares in the ‘company’ which gave them exclusive access to their dwelling and shared use of common areas.
‘Company Share’ apartments are typically older architectural style and they tend to be found in the older suburbs in our older cities – Sydney, Hobart, Melbourne and Adelaide.
There are other forms of apartment titles as well. For instance, In Victoria, in the early 1960s Stratum Title was a forerunner to the strata title regime. It still involved a company share arrangement for common property, but owners also received a title to their unit. And in South Australia, a Moiety or Cross Lease system gave each unit holder a share in the land the apartment block sat on plus a lease to exclusive use of their property.
Beware that these older forms of titles are not just a historical footnote. Banks tend to have tighter lending restrictions – lending as little as 50% of the loan-to-value ratio currently – on non-strata titled apartments, and too often, won’t lend at all. In the case of company share, banks are concerned that the collateral for their loan isn’t the title of a property but a share in a company. In the case of stratum title in Victoria, although the banks do have a title they can claim on, the stratum title legislation gives the stratum scheme’s service company (akin to the body corporate) first claim on a defaulting borrower’s mortgage to pay outstanding service company fees. Naturally, banks aren’t comfortable about potentially being second in line if there is a default.
Consequently, non-strata title apartment can trade at a discount to comparable strata title properties. So make sure you always engage a good lawyer when buying apartments to check the title documents.