Much like ordering everything off the menu at Dinner By Heston restaurant without checking your wallet, searching for properties without understanding your true borrowing power can leave you with a bill that you cannot afford (or get out of).
Whether you are a first-home buyer or looking to upsize or downsize or refinance, speaking to a finance broker should always be your number one priority. A finance broker helps you estimate your borrowing power so you can refinance, search, bid and buy with greater confidence that a loan will be approved.
There are many steps to the house hunting and buying process. But before you start browsing on your favourite real estate site, you will need to know what to set the price filters to. Having a consultation with a finance broker and an assessment of your full financials will give you the confidence of loan approval with the preferred lender. Calculating your (also known as a Borrowing Capacity Estimate) – an estimate of what you could afford to borrow based on your current income and existing financial commitments – will help you refinance or search for properties within your budget.
What is a borrowing capacity estimate?
As the name suggests, your borrowing capacity estimate will let you know what you could potentially borrow so you can begin the search and start looking online. If you are looking to refinance, this will allow you to estimate borrowing capacity by reviewing refinancing options whether to debt consolidate, reduce to a lower rate or purchasing a new property as well.
Despite the confusion, this estimate is not a legally binding document and there is no guarantee you will be approved for a loan or for that amount. Borrowing Capacity Estimates are not financially assessed by the lender and have not been to their credit department – they are not fit for bidding. However, when a full financial assessment is completed by the finance broker will give you the confidence of loan approval with the desired loan amount.
So, why get a borrowing capacity estimate before approval?
There is no point looking at mansions if you can only afford a unit. An estimate will give you an approximate figure of how much you could borrow so you can begin your journey.
Successfully winning at auction with pre-approval only is an extremely risky business. If you cannot get a loan approved in time – or at all – there is a possibility of losing your 10% deposit.
What is approval in principle?
Approval in principle (AIP) is the first step to getting an approved home loan or a refinance application – it will also help you be seen as a more serious buyer, which is a massive plus when you could be up against some serious competition.
Applying for approval in principle is free and should be done when you have an idea of how much you want to borrow, where you want to buy, what type of property you would like to buy and when you are ready to buy. It will help you determine your budget, repayments and the type of properties you should be looking at (e.g. apartments or stand-alone houses).
And unlike pre-approval, approval in principle (AIP) requires a full credit assessment and responsible lending assessment. A lender will look at your requirements and objectives, along with your current financial situation and will ask:
Who you are? You will need to provide formal proof of ID.
How much you earn? This includes your salary, investments or rental income.
How much you own? The lender will evaluate all of your assets, including cars, jewellery, shares and savings.
Do you owe money? From a car lease to credit cards, you will need to declare any debt or loans you currently have.
What are your living costs? The lender will look at your monthly expenses groceries, bills, transport and lifestyle to help estimate your loan.
What type of properties you are looking at? The lender will need to know the suburbs you are looking at, property type and size to ensure it is a good investment for them too.
Does approval in principle mean I am approved?
Put simply, no. There is never a 100% guarantee you will be approved by a lender. But providing your financial circumstances have not changed and you bought a similar style and priced property to the ones your loan is based on (and in the same or close suburb), there is a better chance you will be approved.
To obtain formal approval after winning at auction, the lender will need to see:
The property you purchased. The lender may get the property valued and determine if it meets its Loan to Value Ratio (LVR) requirements.
The contract of sale. The lender will need a fully executed signed contract of sale including the information about the property you bought, including outgoings, permits, zoning and previous works.
Will it expire?
Approval in principle is only valid for 120 days (or 90 days if you are refinancing), so if your circumstances change, you get a new job or even a promotion, you must let your lender know – it could hugely impact your potential borrowing power.
Buying your first home, upsizing or downsizing is always exciting moments in life. Before you start the search, always engage with a finance broker to ensure you are financially stable and your application is low risk. Failing to do so could leave you severely out of pocket.
So, if you are looking for a refinance or purchase a home, let an independent local finance broker help you with the paperwork and the loan approval process from every step of the way till the loan settlement.
This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice. The original context was quoted from ME Bank Shared Blog.