How important is it to manage pre-approvals?

As living costs and interest rates continue to rise, it’s becoming increasingly important for brokers and clients to keep an eye on home loan pre-approvals, a Melbourne-based broker says.

Adele Andrews (pictured), director of Australian Property Home Loans, said lenders continued to assess how inflation affected households and review their household expenditure measures. 

With fixed and variable home loan rates increasing off the back off increased funding costs and cash rate rises, borrowing capacity is subject to change.

A snapshot of a person’s borrowing capacity at a given time, pre-approvals are generally valid for 90 days. If a borrower requires an extension, it’s more important than ever that they not only use a broker, but also that they “stay close to their broker”, Andrews said. 

“If [the client] hasn’t bought and booked in their settlement at 90 days, if they need an extension, they’re not going to be assessed at what that pre-approval rate was,” Andrews said.

“They’re going to have to go through a whole new process at the new rates, the new expenditure measure and what the calculator is that’s been issued by that particular lender.”

Read more: RBA goes hard on interest rates

Client and broker would ideally make contact after 60 days, Andrews said.  After that time, it was unlikely that a borrower could find, purchase and settle a property within the remaining 30 days.

“It’s those that are shopping and are trying to shop with a degree of confidence they have a certain amount of money to spend … if we’re 60 days in and they still haven’t bought anything, they’re the ones at risk,” Andrews said.

Clients frequently want to know their borrowing capacity. When providing figures, Andrews said she puts a caveat on them by explaining to clients that this was “what they could afford today”, and that it “could change tomorrow”.

“The only way you can protect that borrowing capacity is to go into a fully assessed pre-approval. It’s going through a full loan application, subject only to the valuation of the property,” Andrews said.

“It’s being very transparent with the client and saying, ‘This is your borrowing capacity for 90 days … if you get to the 60-day mark and you haven’t found something, we need to reassess, potentially look at the calculator at that point and just be very cautious that you may not be able to have that same borrowing power in 60 days’ time as what you have today’.”

If homebuyers don’t find a property in time and their borrowing capacity has changed with a lender they were pre-approved with, Andrews said there was an opportunity to help them find another lender that may have a different assessment, ultimately providing a different borrowing capacity.

“Only a broker is able to help [homebuyers] search that out,” Andrews said.

Read more: Australia’s biggest bank explains fixed rate rise

People impacted by rising interest rates could be broadly grouped as investors, homeowners and homebuyers, she said.

Due to current low vacancy rates, according to Andrews, investors weren’t necessarily feeling the pinch.  Homeowners seemed more concerned about the cost of living, and homebuyers were hoping rate rises would reduce competition, free up supply and push prices down, Andrews said.

“There’s not a lot of concern from people exploring the market … I think they’ve factored it into their shopping,” Andrews said.

“It’s less about rising rates and more about whether the property market is going to cool.”

However, Andrews said she had noticed clients placing more importance on finding a good rate.

“Fixed rates are obviously high now and it comes down to educating clients that they’re going to go up,” Andrews said.

Although fixing a portion of their loan suited some clients, others were willing to “weather the storm” of increases to variable rates, which were still lower than fixed rates.

“It comes down to their level of comfort and how much assurance they want around their repayments.”

Founded in Singapore, Australian Property Home Loans initially sourced finance solutions for non-residents. 

Having worked as a mortgage broker for about three years, Andrews now focuses on local residential lending.  Operating nationwide, Andrews predominantly works with clients in Western Australia, Perth, Queensland and Victoria.