With more properties soon to hit the market, lenders will be stretched and house hunters should organise finance well ahead of time, property experts say.
That’s not only because lenders receive more mortgage applications during the spring property season.
Lenders have been tightening their lending criteria, which could add further delays to getting approval.
And tighter lending criteria could also mean that just because you had an approval a year ago, you may not qualify now.
Approval times for home loan applications could blow out from four weeks to six weeks, says Vincent Turner, the chief executive of mortgage broker, uno Home Loans.
The number of property sales in September, October and November typically increases from the previous three winter months. Lenders manage this increased workload without putting on extra staff.
Someone who sees a property they want to buy risks missing out if they leave the approval process too late, Turner says.
Mortgage approvals usually last for three months, after which time they need to be renewed.
The first thing that a borrower wants to know is how much they can borrow, but a verbal assurance from a broker or a lender is not enough, says Donna Beazley, a mortgage broker with Oxygen Home Loans.
Borrowers should also get the pre-approval in writing from the lender. If using a mortgage broker, insist on being given the lender’s pre-approval letter, she says.
The letter or email should spell out how much can be borrowed, and how long the approval lasts, Beazley says.
The approval should list the suburbs and type of housing that the borrower intends to buy.
If the personal circumstances of the borrower don’t change, there should be reasonable confidence that the approval will be honoured, she says.
If the lender lifts the interest rate, usually the borrowing limit will not change, says Beazley, who is also the chair-elect of Mortgage and Finance Association of Australia (MFAA).
Any possible problems should be flagged early. For example, many people are paid with a component that is variable, like commissions.
Lenders will assess that pay in different ways, she says.
Not all pre-approvals are the same in terms of the level of confidence that the borrower has the approval will be honoured.
Conditional approval best
Brokers use automated software provided by the lender to calculate how much can be borrowed, says Turner, whose platform allows borrowers to search, compare and settle on a mortgage.
He says with pre-approval, the lender providing the mortgage may not have even looked at the borrower’s documents supporting the application.
Turner says the next level up in certainty for the borrower is a “conditional approval”.
It means the lender has checked the borrower’s documents, like pay slips, bank statements, monthly expenses and proof of genuine savings.
If the borrower has a poor credit rating, that would want to be flagged straight away with the lender or broker, Turner says.
Conditional approval is essential before bidding at auction, he says.
“You don’t want to successfully bid on your dream home and risk losing the house, or worse, risk the deposit because you didn’t get conditional approval before the auction,” he says.
Peace of mind
Scott Johnston, 38, wanted the peace of mind of having the finance sorted well before he started looking seriously for an apartment to live in.
The business development manager bought an apartment by private sale in Melbourne’s Richmond in March and sought approval for a mortgage well ahead of time.
Johnston has an investment property that he has owned for five years and went to a mortgage broker to see how much he could borrow using the equity he had in the investment property.
“I wanted to get into my own place rather than rent,” he says.
“I gave the broker all of the facts and figures and they re-financed from there. They were very specific in the number, the ceiling, whereby I would have no trouble in getting approved, but they made it clear that if I went above that there would be no guarantee.
“They emailed a spreadsheet with the options [of lenders]. The benefit of it is that it told me what I was targeting and stopped me from going over and above what I should be doing.”
What are the conditions?
Sam White, the chairman of mortgage broker Loan Market, says not all conditional approvals are the same.
The best conditional approval is where everything about the borrower has been checked out.
If the borrower’s circumstances don’t change, that should leave only the valuation of the property as a condition, he says.
That”s important because if the lender’s valuation comes in at less than the purchase price, that may put the lender’s loan-to-valuation ratio above what the lender will allow.
Sam Lally, a buyer’s agent at Buyer’s Advocate Australia in Melbourne’s Hawthorn, says there can be wide differences in valuations from different lenders.
“Some are conservative and visit the property while others do a ‘desk’ valuation by comparing the sales of like properties,” he says.
“Buyers should do their own research on prices or get a trusted adviser to help, so as not to overpay,” he says.
Most lenders have lifted the mortgage interest rates they charge investors, often including existing investors who have variable rate mortgages.That’s as well as tightening lending criteria, says Kirsty Lamont, a director of comparator website Mozo.
The higher mortgage interest rates are part of their response to increasing their capital adequacy at the behest of regulators, she says.
“Our research shows almost nine out of 10 borrowers with variable rate loans have been hit with an interest rate rise in the past two years despite the Reserve Bank not lifting the official cash rate over that time,” she says.
“Many lenders have toughened their loan criteria off-the-back of pressure from regulators by lifting their interest rate buffer used to assess whether borrowers can afford to take out a mortgage.
“Some lenders have even introduced strict postcode restrictions by requiring borrowers to have a larger deposit for specific areas,” she says.
Lamont says those with variable rate mortgages should expect they will be paying higher interest rates.
“We expect banks to continue to increase interest rates independently of the Reserve Bank cycle with investors and interest-only borrowers likely to be the most affected.
“It’s more important than ever for homebuyers to future-proof themselves against mortgage stress by factoring-in at least a two percentage point increase in their mortgage rate,” Lamont says.