Choosing a lender and loan pre-approval

When purchasing a home, choosing your lender is one of the key decisions you will make. This guide discusses the various lender options that are available, and outlines what YOU need to do to ensure that you receive the required funding for your purchase.

Bank versus Non-Bank Financial Institutions (NBFI’s)

Generally speaking there is very little difference in the home loan products offered by banks compared to non-banks. Some may argue that non-banks offer a greater degree of personal service due to their smaller client base but even this distinction doesn’t hold the same level of truth it once did. The major difference between the two lending institutions is that NBFI’s are usually more flexible and have a higher ability to tailor the loan to suit the borrower’s needs. Banks generally have more bureaucratic ‘red tape’ to deal with and hence less flexibility. However, take note, as NBFI’s receive their funding primarily through wholesale markets (rather than retail deposits), their sensitivity to global markets is more than that of banks. What does this mean? Well, it means that if macroeconomic factors become worse, NBFI’s are more likely to increase their interest rates by more than banks will. At the end of the day, there is little difference between going with a bank and going with a NBFI. Trends in US and Europe suggest that NBFI’s are under utilised in Australia due to lower perception and an instinctive habit to go with brands that we know.

What does a mortgage broker do?

A mortgage broker acts as an intermediary between you and the lender. A mortgage broker will:

• Identify your needs
• Identify lending options that suit your needs
• Negotiate on your behalf with the lending institutions
• Arrange all necessary administration in order to finalise the mortgage

The benefits of using a broker are considerable. Firstly, there is no charge to you in using a broker. Great deal! A broker will earn their fees through commissions from the lending institutions. Secondly, a mortgage broker should have strong market knowledge and hence be able to provide advice on the pro’s and con’s of many different options. This not only improves your chance of selecting the right loan for you, it also saves you time!! A final note, make sure that do your homework when it comes to selecting the right broker. Be sure to ask how many lenders the broker deals with, what fees they receive, what fees do you get charged, and is the broker a member of the Mortgage Industry Association of Australia (MIAA). It always best to ensure you have the right person working for you.

Getting Pre-Approval

Home loan pre-approval is something that every budding home buyer should get, even if you are not sure whether you want to borrow or not. Effectively, pre-approval last for three months (in most cases) and it is offered by most lenders. Pre-approval is similar to full finance approval however the difference is that, at this stage, the property you are wanting to purchase has not been determined. Furthermore, pre-approval will generally give you a cap on how much you can borrow. Therefore, you know what you limit is. Under a formal approval (following exchange of contracts), the specific amount being borrowed from the lender is specified (based on the purchase price of the property) rather than a ‘capped’ amount.

What type of Pre-approval should I go for?

There are many different types of pre-approval available but for piece of mind it is best to go with ‘unconditional pre-approval’. This offers the most finance certainty when you are bidding at auction or when negotiating directly with the vendor. Importantly, lenders usually charge assessment fees but many argue that the cost of getting the unconditional pre-approval is worth it.

How do I get Pre-approval?

Before giving you pre-approval, most lenders require you to provide them with documentation which substantiates your identity and your ability to repay the loan. This includes proof of identification, proof of income, proof of residence, proof of current liabilities, proof of other assets (not held with that lending institution). Once you have received your approval, the lender will issue you with a certificate verifying that your finance has been approved for a specific length of time. The amount you will qualify for will depend on your financial situation as well as the lender’s criteria.