Recently Australia has seen some of the lowest interest rates in history. This has made for a buoyant property market that is packed with eager buyers who are keen to take advantage of historically low mortgage repayment costs.
The downside of these remarkably low interest rates is not only a lot of competition on the market, but very long wait periods for people applying for loans. Some lenders are asking 3 – 4 weeks between loan application and a response.
This is not great news if you are shopping for a property and finding yourself up against several other bidders. By the time you have approval the house you are dreaming about could be well and truly sold.
This is why pre-approval is so important.
What is pre-approval?
In terms of mortgages, pre-approval means that your lender has given you a tentative ‘thumbs up’ to secure a loan and buy a property.
To get pre-approval from your lender, you will have to supply a number of important documents, including identification, bank statements, tax returns, your credit history and documents confirming your work history. All this comes together to prove to the bank that you are and will continue to be capable of making mortgage repayments on a regular basis.
When you apply for pre-approval, your lender will take into account your income as well as your expenses. It will also consider the possibility of interest rates going up in the future, factoring that cost into your predicted repayments. Once it has gathered all the information it needs, including the amount of deposit you have ready to put forward, the lender will give you an idea of how much you can borrow to purchase a property and give you ‘pre-approval’ to borrow this amount, providing your circumstances don’t change drastically.
The benefit of getting pre-approval is that you can confidently undertake your property search knowing that you are 90% of the way towards getting your loan. Having pre-approval means you can bid confidently at auction, knowing that you will have access to the money you need. It also means that you can make an offer and assure the current owner that you will be able to come through on that offer.
Pre approvals are free to obtain, but they will only be valid for a limited time (generally up to 3 months) so if you are considering applying for pre-approval you should have your deposit ready and be serious about making a purchase as soon as possible. Applying for pre-approval can also alert you to any problems you may encounter while applying for a loan, giving you the time to get your finances in order before you hit the housing market.