As mortgage lenders tighten their lending criteria, it is more important than ever for buyers to secure finance before putting down a deposit on a property.
Purchasers who fail to come up with the money by the date of settlement risk losing their deposit.
Sheldon Rodrigues had a scare when the mortgage he thought had been organised through a mortgage broker fell through.
Sheldon and his wife, Michelle, went to see a mortgage broker who told them how much they could afford to spend on a house.
The broker told them that all they would have to do is to put down a deposit for a house within their borrowing capacity and then return to him for the mortgage to be arranged.
However, the broker did not go the next step to arrange a formal assessment with the lender that the broker had identified.
The Melbourne couple, who have twin five-year-old boys, were just about to pay the 10 per cent deposit on their dream house.
However, on returning to the mortgage broker the story had changed. They were told their borrowing capacity was less than they had been led to believe and the lender would not be able to provide the mortgage.
The couple did their research online and, at the suggestion of a friend, made contact with ME, which sent around a mobile lender.
After three days, ME gave the couple a written “conditional” approval.
Sheldon says his experience shows how it is absolutely necessary to arrange approval from the lender in writing before handing over the deposit on a property.
Lenders provide “conditional” approvals in writing that are usually valid for up to three or four months.
But the approvals are more “conditional” than they may seem. Lenders can apply new lending criteria at any time within the three or four-month period of the approval.
Re-assessment can mean the buyer is not allowed to borrow as much.
A much higher level of comfort is provided for buyers with an “approval in principle”.
The names that lenders use for this stage of the application process vary, but it is the stage where the lender has verified the information provided by the applicant such as income and credit checks.
These are usually good for up to three or four months. This gives buyers a high degree of certainty to buy a property up to an agreed limit; providing the buyers’ financial circumstances remain unchanged.
Lenders’ lending criteria have tightened recently, making it even more important than usual to lock in finance before going property hunting.
Most lenders have lifted the mortgage interest rates they charge investors, sometimes including existing investors who have variable rate mortgages.
The higher mortgage interest rates are part of their response to increasing their capital adequacy at the behest of the regulator, the Australian Prudential Regulation Authority.
Lenders have also been tightening their lending criteria across their mortgage products because of concerns by the regulator that lending standards were becoming too lax.
Under new lending criteria, for example, interest rate “buffers” have been increased.
Normally, lenders like to know that the household finances can withstand an increase in their mortgage rate of about 1.5 to 2 percentage points above the mortgage interest rate they will be paying.
But that buffer is now more likely to be 2.25 to 2.5 percentage points. Also, for investors, the rental income is being discounted by 20 per cent and some lenders are not taking into account the benefits of negative gearing.
Those who have previously bought property should not assume that the loan assessment criteria and processes will be the same as before.
Mortgage brokers say consumers have to be careful. Lenders started increasing their mortgage rates for investors and tightening lending criteria across the board about a month ago.
Kevin Lee, the principal of Smart Property Adviser and a Smartline broker, says those who obtained an approval recently should check with their lender to make sure the borrowing capacity is unchanged.
Another Smartline broker, Grant Matthews, says that he has re-adjusted purchase prices downwards after some approvals expired.
His says, one client, an owner-occupier, had his maximum purchase price reduced from about $1 million under an old conditional approval to about $920,000 under the new approval from the same lender.
Michael Hendricks, general manager of credit risk at ME, says buyers have to make sure they have all of their “financial ducks in a row” before putting down a deposit on a property.
“Our advice has always been talk to your lender or to a trusted broker and have as much as your financing needs locked away before you bid at action or negotiate for a purchase through a real estate agent,” Hendricks says.