From first home buyers to families looking to upgrade their home, or buying an investment property, a pre-approval is an important step in planning for your purchase.
The importance of a pre-approved home loan
A pre-approval is a confirmation from a lender, that they have agreed in principle to lend up to a specified amount of money towards your purchase.
It helps provide you with a level of confidence, that once you have signed a contract, the lender is more likely to provide a full approval. A pre-approval is often issued with several conditions, including obtaining a satisfactory valuation. Pre-approvals are normally valid for a period of up to 90 days. If a contract hasn’t been signed by the end of that timeframe, the pre-approval will lapse, or some lenders may offer the opportunity to extend for an additional 90 days.
Are all pre-approvals the same?
The simple answer is no, all pre-approvals are not the same. Below are examples of different levels of pre-approved home loans.
Fully assessed pre-approval
A fully assessed pre-approval is the highest standard. Having a fully assessed pre-approval, means it has been fully reviewed by a credit manager to the same level, as if you were lodging a full application with a purchase contract. This type of pre-approval is strongly recommended for clients looking to bid at an auction, given that a successful auction bid leads to an unconditional contract to buy the property.
System assessed pre-approval
A system assessed pre-approval is the second level of pre-approved home loan. This is where the lender’s assessment system is reviewing information provided by the applicant and referring to their credit file to provide a system decision. This type of pre-approval will often provide a quicker decision, but without the additional oversight of a credit manager reviewing the data and applying it against their credit policy. The pre-approval in this case, is highly conditional on the information provided being reviewed and assessed in full at a later stage, when a contract is signed and formal approval sought.
You will find that some lenders don’t offer pre-approvals at all, looking to prioritise applications that include a signed contract and borrowers wanting to refinance.
I have a pre-approval, but interest rates have just increased. Is my pre-approval still valid?
In short, it depends on the lender.
Most lenders’ assessments are currently factoring in a 3% interest rate ‘buffer’ over the loan interest rate at the time the assessment is made, because when the interest rate changes, so too does the assessment rate lenders use.
Some lenders will honour the assessment rate applicable at the time a pre-approval was lodged, even where interest rates have increased in the following months. When a contract is signed, that original assessment remains valid, providing there is no increase to your loan amount or other material changes to your application.
Some lenders however reserve the right to apply the current assessment rate at the time you sign a contract. This can present some challenges where interest rates have increased since your initial pre-approval, as it means the assessment rate used will be higher and your borrowing capacity will be reduced.
Is a pre-approval the right option for me?
In deciding whether to lodge a pre-approval, this will depend on your personal circumstances and specific requirements when looking to buy.
The pros – Having a pre-approval in place can provide you with confidence when looking to make an offer and negotiating on a contract. It can also help to speed up the application process with some lenders when you ultimately sign a contract.
The cons – Lodging a pre-approval adds a new credit inquiry to your credit file and multiple credit inquiries can over time impact your personal credit score. Lenders are paying more attention to the increasing information now appearing on credit files and place a heavy reliance on an applicant’s credit score.
Ultimately, pre-approvals can be a highly valuable step in your home buying journey. We recommend you reach out to the Seek Financial team to discuss your property purchase plans and how best to prepare.
The above information is general in nature. It has been prepared without taking into account your objectives, financial situation or needs.