21 April 2016

Do I need a finance pre-approval?

Do I need a finance pre-approval?

Finance is a very important piece of the investment property puzzle. Understanding your pre-approval position can provide you with the confidence and comfort when taking the leap into buying an investment property.

What is a pre-approval?

A finance pre-approval is an indication from a financial institution that they are willing to lend a certain amount of funds to an individual. This is based on your current financial situation i.e. your assets vs liabilities.

What information do you need to provide to obtain a finance pre-approval?

1. Proof of deposit
2. Proof of income, and
3. Monthly expenses and other liabilities including loans and credit cards

It is not a formal or final approval as it will always be re-assessed when you submit an actual property as security. Whilst it is not a prerequisite to start looking for an investment property, it does help to tease out your ability to borrow funds and any issues the banks might have with you as a borrower. If you are thinking of investing, speaking to your mortgage broker sooner rather than later can assist with getting the process underway.

What are the benefits of a finance pre-approval?

– Remains valid for up to 12 weeks (3 months)
– Gives you the comfort and confidence of your financial position
– Allows you to understand which properties you can afford
– It may quicken the settlement process, as the loan is already partly approved

Am I guaranteed to be pre-approved?

Unfortunately, you are not guaranteed to be pre-approved by a lender. In general terms, a lender will assess you on your current assets, income and debt. Some common reasons for not being pre approved include:

– You have a poor credit rating
– The loan amount exceeds 80% of the property value
– Interest rates have increased which will effect your borrowing ability
– Your income is not at a level to service the loan
– You have too many loan requests on your file. Each time you apply for a loan it is documented and kept against your file. This can raise some red flags for other lenders down the track
– You’ve hit your borrowing capacity through other property you already own. You may need to sell down some underperforming property to improve your borrowing capacity.
– Your credit card limits may be too high. Regardless if you pay off your credit card in full each month, the bank will take the limits into servicing calculations.
– You have added a new addition to your family. Having more dependants can negatively impact a finance approval

This article is provided for general information only and does not constitute personal advice, as it does not take into consideration your personal circumstances. Please consult a licensed tax or financial advisor before making any decision to invest.