Finance and approval

Finance is the part of your purchase the selling agent can’t see but will always ask about. Make it certain, and you can move faster and negotiate with more confidence than buyers whose approval is still a maybe.

What pre-approval is, and isn’t

Pre-approval (conditional approval) is a lender’s in-principle agreement to lend you up to a stated amount, subject to conditions, always including a valuation of whatever property you eventually buy. Get it before you shop seriously: it fixes your real budget, marks you as a credible buyer, and finds problems while they’re fixable. But know its limits. Some “pre-approvals” are system-generated in minutes without a human reading your documents; ask whether yours was fully assessed by a credit officer, because the unassessed kind collapses at the worst moment. And it typically expires after about 90 days. Renewing is usually straightforward, but it’s a fresh assessment: if rates have risen or your circumstances changed, the number can come back smaller. Our pre-approval guide covers the paperwork.

Between pre-approval and final approval, live like the application is still open, because it is: don’t change jobs if avoidable, don’t take on new debt or raise card limits, don’t make patterns of unexplained spending, and don’t lodge applications with multiple lenders for sport, since every hard enquiry lands on your credit file.

Valuation shortfalls: the quiet deal-killer

Final approval hinges on the lender’s valuation of the specific property. Banks lend against the lower of price and valuation, so if you contract at $800,000 and the valuer says $760,000, your 80 per cent loan just shrank by $32,000, and the gap comes from your pocket. Shortfalls cluster in fast-moving markets (valuations look backward at settled sales; you bid forward), off-the-plan purchases, and unusual properties with thin comparables.

If it happens: ask the broker to challenge the valuation with better comparables (it sometimes works), order a valuation through a second lender (valuers differ more than banks admit), renegotiate the price with the valuation as evidence, or exit under your finance clause. Every one of those options is better than the fifth, which is finding the gap on a credit card. If you bought at auction with no finance clause, the gap is simply yours; re-read Chapter 7’s pre-auction checklist.

Investor lending: a different counter

Investment loans run on harsher settings than owner-occupier loans, and pricing your purchase on owner-occupier assumptions is a rookie error:

• Rates run higher, typically 0.2 to 0.6 percentage points above comparable owner-occupier loans, with interest-only versions higher again.
• Interest-only periods (commonly five years) maximise deductible interest and cash flow, but you’re assessed on your ability to repay principal over the remaining term, which cuts borrowing power, and the repayment jump at the end of the IO period is real.
• Rental income gets shaded: most lenders count only about 80 per cent of expected rent, to allow for vacancy and costs, and then add their own estimates of expenses on top. Your spreadsheet says the rent covers the loan; the bank’s says otherwise, and the bank votes.

Structure matters more for investors than anyone: loan splits, offset placement, and keeping investment debt cleanly separate from private debt all have tax consequences. Get the structure advice before settlement; restructuring afterwards ranges from expensive to impossible.

Broker or direct?

Roughly three in four new Australian home loans are now written through mortgage brokers, and the logic is plain: one application, dozens of lenders, and the broker is paid commission by the lender rather than by you. Brokers also carry a legal best interests duty to you; a bank’s own lending staff carry no such duty and can only ever offer that bank’s products. The counterweights: a broker’s panel doesn’t include every lender, commission structures can subtly favour some products, and a mediocre broker is worse than a good bank banker. Going direct can work better when you have a strong existing banking relationship or a lender outside broker panels. Whichever path, compare at least two offers, and ask the broker straight: “Which lenders pay you most, and is one of them this recommendation?” Good ones answer without blinking.