Episode Details

Many lenders are taking a number of weeks (sometimes months) to approve loans at the moment. These delays have been caused mainly by significantly higher mortgage application volumes and the operational disruption from onshoring back-office services due to Covid lockdowns in the Philippines and India.

As such, banks are prioritising applications for borrowers that have already purchased property and have a definitive settlement date to meet. Consequently, pre-approval applications are low priority and can take a long time to arrange. This blog discusses the pros and cons associated with buying a property without a loan pre-approval.

What is a mortgage pre-approval?

A pre-approval is a conditional loan approval. Typically, the main condition is that the borrower is able to offer a suitable property as security for the proposed loan. For example, a bank may approve a loan for $800,000 subject to the borrower buying an acceptable property that is valued by the bank at an amount of at least $1,000,000 (to keep the loan to value ratio at 80%). The only other condition might be that the borrower’s financial circumstances do not change. This is called an approval-in-principle (AIP) or pre-approval.

Arranging a written pre-approval with a bank (via a mortgage broker), gives borrowers a higher level of certainty that, if they go ahead and purchase a property, that the bank will ultimately unconditionally approve a loan to fund that property.

Pre-approvals do not attract any fees (they are free) and you are not obligated to use that lender or borrow the pre-approved amount.

What could go wrong even if you have a pre-approval?

Things can still go wrong even if you have a pre-approval.

Typically, the only material risk is that the bank values your new property below the purchase price. The bank will lend against the contract price or valuation, whichever is lower. If the property valuation is lower than purchase price, it will mean you won’t be able to borrow as much and you must contribute more cash (or additional property as security).

For example, if you buy a property for $1,000,000 and need to borrow 80% (or $800,000), and the property valuation comes back at $950,000, the bank will reduce your loan amount to 80% of that value, being $760,000. That means you must contribute another $40,000 of cash to be able to settle on the property.

The other risk is a change in circumstances (such as losing your job) occurring between when the pre-approval was issued and when the loan is ultimately formally approved. Of course, if your circumstances change before you have purchased a property, you should go back and speak to your bank or broker. If your circumstances change after you have purchased but prior to a loan being fully approved, that could be problematic, although this is very, very rare.

Are low valuations common?

No. By definition, the value of a property is what the market is prepared to pay for it. Therefore, if you have purchased a property in a standard open-market sale, that is usually strong evidence of its current market value.

However, if there are not enough sales of comparable properties to support your purchase price, that is when a low-valuation becomes a risk.

It is possible to challenge a bank valuation by providing additional evidence, but this usually has a low success rate for a variety of reasons. In our experience, the most expedient solution is to go to another bank. More often than not, alternative banks (which means alternative valuers) will value the property at contract pric