A useful starting point
Approval in principle, sometimes called conditional approval or pre approval, is an early indication of what a lender may be prepared to lend. It is generally based on information about the buyer's income, expenses, liabilities, credit history and available funds.
It can help establish a realistic budget before the property search begins. It is not a guarantee that a loan will be approved.
The lender may still need to verify the buyer's financial information, assess the chosen property, obtain a valuation and confirm that all lending requirements have been met. The approval may also expire or need to be reviewed if the search continues for some time or the buyer's circumstances change.
Approval in principle does not replace a finance condition in a property contract. Buyers should obtain advice about the proposed contract and their borrowing position before making an offer or bidding at auction.
What still needs to happen
Once a property has been selected, the lender may undertake a more detailed assessment of both the borrower and the property. This can include verifying financial information, completing a valuation and checking whether the property meets the lender's requirements.
Written approval may still contain conditions that need to be completed before loan documents are issued or funds become available for settlement. Buyers should confirm what remains outstanding rather than relying only on the word approved.
A lender or mortgage broker can explain the lending position and any outstanding requirements. A solicitor or law practice should advise whether the position is sufficient for the finance condition in the property contract.
The Finance Clause guide explains how the contractual condition, finance date and required notice may operate in a Queensland property purchase.
LVR and LMILoan to value ratio and lenders mortgage insurance
Loan to value ratio, commonly shortened to LVR, compares the amount borrowed with the value the lender assigns to the property.
For example, a loan of $800,000 against a property valued by the lender at $1,000,000 represents an 80 per cent loan to value ratio.
A higher loan to value ratio can affect the lender's assessment, available loan products, interest rate and whether lenders mortgage insurance is required.
Lenders mortgage insurance, commonly shortened to LMI, protects the lender if the borrower cannot repay the loan and the lender experiences a loss. The borrower generally pays the premium even though the insurance protects the lender.
Lenders mortgage insurance may apply when a buyer borrows more than 80 per cent of the lender's property value. Requirements, costs and possible exceptions vary between lenders, loan products and borrowers.
A lower loan to value ratio may provide access to more lending options and reduce or avoid lenders mortgage insurance. It does not guarantee a particular interest rate or loan approval. A lender or mortgage broker can explain how the requirements apply to the buyer's circumstances.
How a lender valuation can affect finance
A lender may arrange a valuation to help determine whether the property provides acceptable security for the proposed loan.
The lender's valuation is prepared for lending purposes. It may not be the same as the purchase price or a separate valuation obtained by the buyer.
If the lender values the property below the purchase price, the requested loan will represent a higher percentage of the lender's value. The lender may reduce the amount available, require lenders mortgage insurance, apply different conditions or decline the proposed loan.
For example, a buyer agrees to pay $1,200,000 and requests a loan of $960,000. If the lender values the property at $1,100,000, the requested loan represents approximately 87 per cent of the lender's value rather than 80 per cent. The buyer may need additional funds or a different lending arrangement.
A valuation shortfall does not automatically provide a right to terminate the property contract or require the seller to reduce the price. Buyers should speak with their lender or mortgage broker and obtain legal advice about the contract before the finance deadline.
Allow for more than the purchase price
The purchase price is only one part of the amount a buyer may need. Some costs apply to most purchases, while others depend on the buyer, property, loan and investigations undertaken.
Transfer duty
Transfer duty may apply to a Queensland property purchase. The amount depends on the dutiable value and whether the buyer qualifies for a concession or exemption. Use the Queensland Revenue Office estimator and obtain advice for the purchase.
Legal costs
Allow for contract advice, conveyancing work, searches, settlement and any related disbursements. A solicitor or law practice can explain the likely costs for the transaction.
Building and pest inspection
The cost depends on the property and scope of the inspection. Buyers should consider whether separate specialists or further investigation may also be required.
Loan costs
Application, valuation, settlement, package and ongoing account fees vary between lenders and products. Lenders mortgage insurance may also apply.
Insurance
Confirm when responsibility for the property passes under the contract. In many Queensland residential purchases, the property is at the buyer's risk from 5 pm on the next business day after the contract date. Obtain advice and arrange suitable cover when required.
Property searches and reports
Council searches, body corporate records, surveys, flood information and other investigations may be appropriate depending on the property.
Settlement adjustments
Rates, water charges, body corporate levies and other outgoings may be adjusted between the buyer and seller at settlement.
Moving and early ownership costs
Allow for moving, utility connections, maintenance and any work required after settlement.
Transfer duty is generally calculated using the higher of the consideration paid or the property's unencumbered value. Concessions or exemptions may reduce the amount, including to nil in some circumstances. Check the current Queensland Revenue Office requirements.
Common loan features to understand
The interest rate is only one part of a home loan. Fees, repayment structure, access to funds and the way a loan may respond to changing circumstances can also matter.
Offset account
An offset account is a transaction account linked to an eligible loan. Its balance reduces the amount of the loan on which interest is calculated. Availability, fees, interest rates and offset arrangements vary between products.
Redraw facility
A redraw facility may allow a borrower to access eligible additional repayments made to the loan. Access conditions, limits and fees depend on the loan. Redraw and offset accounts are structured differently and may have different tax consequences.
Variable rate
A variable interest rate can move over time. Repayments may change when the rate changes. Variable loans may offer features such as an offset account, redraw or additional repayments, depending on the product.
Fixed rate
A fixed interest rate applies for an agreed period. It can provide repayment certainty during that period, although limits on additional repayments, offset features and break costs may apply.
Split loan
A split loan divides borrowing between fixed and variable portions. This can combine some repayment certainty with selected variable loan features, depending on the product.
Interest only
During an interest only period, repayments generally cover interest without reducing the amount borrowed. Repayments can increase when principal repayments begin. Buyers should understand the total cost and later repayment amount before choosing this structure.
Loan features can involve different costs, restrictions and tax consequences. A lender or mortgage broker can explain the loan products. An accountant or registered tax adviser should advise on tax matters.
Buying before selling
Bridging finance is a temporary lending arrangement that may help fund a new property before the sale of an existing property is completed.
The structure, available term, interest treatment, repayment requirements and lending criteria vary. The buyer may need to demonstrate that the arrangement remains affordable if the existing property takes longer to sell or sells for less than expected.
Before proceeding, understand the lender's assumptions about the expected sale price, time allowed for the sale, total debt during the bridging period and what happens if the sale is delayed.
Bridging finance can create significant financial pressure if the existing property does not sell within the expected timeframe or produces less money than anticipated. Buyers should understand the lender's requirements and have a realistic contingency plan.
Alternatives may include selling first, arranging temporary accommodation, negotiating settlement timing or proposing a contract subject to the sale of another property. Availability and suitability depend on the circumstances and the agreement of the other parties.
Working with a lender or mortgage broker
Buyers can approach a lender directly or use a mortgage broker. A broker generally works with a panel of lenders rather than every lender or loan available in the market.
A mortgage broker can help compare available options, prepare an application, communicate with the lender and explain outstanding lending requirements.
Mortgage brokers providing credit assistance are required to act in the consumer's best interests. They must also provide information about relevant fees, commissions and relationships as required by the credit laws.
Clear and accurate information helps the lending assessment progress. Buyers should disclose their financial position, provide requested documents promptly and advise their lender or broker if their circumstances change.
Questions to ask:
- Which lenders and products have been considered?
- Why is the recommended loan considered suitable?
- What fees, commissions and ongoing costs apply?
- How long is the lender currently taking to assess applications?
- Is a property valuation required?
- What conditions remain before funds will be available?
- What happens if the valuation is below the purchase price?
A clear borrowing position makes it easier to assess properties and prepare an offer that reflects the buyer's circumstances. The aim is not to become a finance expert. It is to understand the main figures, know what remains outstanding and have the right people advising on the loan and the contract.