If you’ve been looking to buy a home or investment property recently, you may have received an unpleasant surprise.
Since the Federal Budget in May, a number of banks have changed how they assess borrowers, particularly property investors. Some lenders have tightened their serviceability calculations before the new tax laws have even taken effect, while others have advised that existing pre-approvals may need to be reassessed before a loan becomes unconditional.
For many Australians, this has been both confusing and frustrating.
After all, isn’t a pre-approval supposed to give you certainty?
What is a pre-approval?
A pre-approval (sometimes called an approval in principle) is an indication from a lender that, based on the information you’ve provided, they’re prepared to lend you up to a certain amount.
However, many people don’t realise that a pre-approval is not a guarantee.
Most pre-approvals are conditional. They remain subject to the bank confirming your financial position, reviewing the property you wish to purchase and ensuring you still meet the lender’s credit policy at the time the loan becomes unconditional.
If the bank changes its lending policy in the meantime, your borrowing capacity can change too.
Why are banks tightening now?
Following the May Federal Budget, several lenders have already adjusted the way they calculate borrowing capacity for some investment loans, even though parts of the proposed legislation are still progressing through Parliament. Other lenders have indicated they will assess applications under whatever lending policy is current when unconditional approval is sought.
The result is that some borrowers are finding they can no longer borrow as much as they could just a few weeks earlier.
So what should you do?
Firstly, don’t panic.
If you’re still searching for a property, contact your mortgage broker or lender and ask for your borrowing capacity to be reviewed under the latest lending policies. It’s far better to know your current position before making an offer than after you’ve signed a contract.
Secondly, avoid stretching yourself to the absolute maximum.
Just because a bank says you can borrow a certain amount doesn’t necessarily mean you should. Leaving yourself a financial buffer can help if interest rates, lending policies or your personal circumstances change unexpectedly.
Thirdly, if one lender has reduced your borrowing capacity, don’t assume every bank will reach the same conclusion.
Each lender has its own credit policy, assessment methods and appetite for different types of borrowers. A good mortgage broker can often compare multiple lenders and identify one whose policies better suit your circumstances.
The value of good advice
One of the biggest misconceptions is that arranging a home loan is simply about finding the lowest interest rate.
In reality, the right lender today may not be the right lender tomorrow if your circumstances change, particularly if you’re planning future property purchases, renovations or investment strategies.
Recent events are a reminder that lending policies can change quickly, sometimes with very little notice.
Having your trusted SWU Group mortgage broker in your corner means you have someone monitoring those changes, explaining what they mean for you and helping you adapt before they become a problem.
In an environment where lending rules continue to evolve, good advice can be just as valuable as a competitive interest rate.
Reach out to us if you need to re-assess your loan circumstances or pre-approvals