Do I need to get pre-approval for my investment loan?
Once you’ve selected a loan product, a formal pre-approval is the next critical step in purchasing an investment property.
Pre-approval is when a lender approves a maximum amount to lend you based on a full assessment of your financial situation and the type of investment you’re making.
To make things easier, your mortgage broker will complete all the paperwork and follow up’s involved in the pre-approval process.
Advantages of home loan pre-approval for property investors:
- You'll know exactly how much you can spend
- You know what your repayments will be and can compare those to comparable rents in the area
- Your final loan will be organised faster
- There's no cost to you
Be wary of any website that offers you a pre-approved home loan without taking the time to assess your financial situation. Unless a bank or lenders has fully assessed and approved your financials, any ‘approval’ you get may not accurately reflect what you can actually borrow.
What is a Deposit Bond?
Deposit Bonds are popular with property investors who are relying on the equity they have in another property to secure their purchase and have limited cash savings for a deposit.
While you are organising your pre-approval, it can be a good idea to look into getting a deposit bond. A deposit bond is an insurance policy whereas the policy document tells the vendor that your insurance company will pay a 10% deposit when the deposit would normally be paid to vendors when a property price is agreed upon.
The benefit of using a deposit bond is that the cash you would normally have to deposit to the lender upon securing the sale can be kept in your account until the property settlement. Deposit bonds are popular with purchasers buying a property off-the-plan and those buying at auction. It is important to ask the agent(s) of any property you’re interested in buying if they accept Deposit Bonds to cover the purchase.
Get a head start on other buyers and have your investment loan pre-approved.
It'll help you shop realistically within your budget and give you the confidence to bid at an auction
A formal pre-approval works the same way as a formal loan application, except without the security details. A formal pre-approval is different to using an online calculator to work out how much you can borrow. With a formal pre-approval, your lender assesses your income, expenditure, assets and liabilities to work out how much you can borrow.
Don't think of it as a restriction, however - think of it as your guide.
Before you got approval you may have been uncertain of what you could afford. Now, with a pre approved mortgage, you'll know exactly how much money you have to work with.
This can give a much needed focus to your property hunt. You needn't worry about wasting your time looking at properties you may later find out you can't secure finance for.
Instead, with the pre approval already in place, you'll be able to be more efficient and concentrate on places that are within your means.
Be prepared to act
There is no better preparation for the act of making an offer on a house, unit or apartment than to have your home loan pre approved. If you wish to bid at an auction then pre approval is mandatory.
Without it, you won't be able to take part. Having things sorted ahead of time also means you can act quickly when dealing with all types of property sale. And speed can be very important indeed.
If you are in a situation where your offer is up against other buyers who haven't arranged their finance beforehand, this could be to your advantage.
At the very least, sellers will see that you are serious about buying and that you have taken the effort to gain conditional approval from a lender.
This could give you more power to negotiate with property sellers. You may end up with a better deal as a result.
Once a price is agreed, final unconditional approval will come through faster. That means less waiting and anxiety.
Don't pay a cent
You might expect to have to pay for all of these benefits. Luckily, you don't, because home loan pre approval is free.
What's more, you don't have to follow through with the loan either.
A pre approved loan is valid for up to three months. If you don't manage to find the right place in that time, all you need to do is re-apply again once the period is up.
Speak to a mortgage broker about getting formal home loan pre approval for your investment property purchase.