Home Loan Pre-Approval: What Not to Do Before You Apply

A home loan pre-approval tells you how much a lender is likely to let you borrow before you start making offers. The mistakes that cause problems usually happen in the weeks before you apply, so a little preparation goes a long way.

This article is for Ocean Reef residents who are thinking about buying or upgrading and want to know what to avoid before a lender looks at their finances.

What Is Home Loan Pre-Approval and How Does It Work?

Home loan pre-approval is a conditional indication from a lender of how much you may be able to borrow. It is not a final approval, and it usually depends on the property, a valuation and your finances staying the same.

The lender assesses your income, expenses, debts and savings. If the result is positive, you get a conditional approval for a set period. That lets you shop with a clear budget. It does not commit you to borrow, and it does not commit the lender to lend if your circumstances change or the property does not meet their requirements.

A broker can compare lenders for you before you apply, because each lender assesses income and expenses a little differently. You can also get a quick estimate with our borrowing capacity calculator.

Which Mistakes Reduce Your Borrowing Capacity Before You Apply?

The biggest mistakes are taking on new debt, letting credit card limits sit high and spending in ways that make your expenses look larger. Each of these can lower the amount a lender is willing to offer.

Lenders generally look at your credit card limits, not just the balance you owe. A card with a high limit that you never use can still reduce your loan amount, because the lender assumes you could draw on it. Closing cards you do not need, or lowering their limits, before you apply can help.

Other things to avoid in the lead-up:

• Taking out a car loan or buy now, pay later account
• Applying for several credit products in a short period, which can leave multiple enquiries on your credit file
• Changing jobs mid-probation without checking how the lender will treat it

The trade-off is that closing a card may affect your credit file, and lowering the limit is an alternative. It is worth checking with a broker or lender before you act.

How Do Lenders Assess Your Spending?

Lenders review your bank statements to see what you actually spend, and they compare it with the living expenses you declare. If your statements show higher spending than your application, the lender will usually use the higher figure.

Consider a buyer who declares modest living costs but whose statements show regular dining out, subscriptions and regular payments to other people or accounts that the lender may treat as expenses. The lender uses the statement figures, and the pre-approval comes back lower than the buyer expected. In a scenario like this, the buyer can spend two or three months trimming unnecessary subscriptions and keeping a clear record of spending. When they reapply, the statements support a higher assessed capacity. The lesson is that your day-to-day habits count as much as your income.

Should You Choose a Fixed, Variable or Split Rate at Pre-Approval?

You do not lock in a rate at pre-approval, but it helps to know which structure suits you. A variable rate can move up or down, a fixed rate stays the same for a set period, and a split loan divides your balance between the two.

A variable rate usually offers more flexibility, such as extra repayments and an offset account. The cost is that your repayments can rise if rates go up. A fixed rate gives certainty, but extra repayments are often capped and breaking the loan early can trigger break costs. A split loan gives you some of each, but you manage two balances.

To see how repayments work, take an illustrative rate of 6.75% p.a. on a $600,000 loan over 30 years with principal and interest. The monthly repayment comes to about $3,891. Your own figures will differ with your loan amount, term and lender, so run your numbers through a calculator before you commit.

If you want to compare options, our home loans page explains the main structures.

What Should You Know About Deposits and Lenders Mortgage Insurance?

A smaller deposit usually means a higher loan to value ratio (LVR), and a higher LVR can mean you pay Lenders Mortgage Insurance (LMI). LMI protects the lender, not you, and the cost is often added to your loan.

The exact LMI cost depends on your deposit, loan amount and lender, so ask for a quote early. Some buyers wait and save a larger deposit to avoid LMI. Others choose to buy sooner and accept the cost. Each approach has a trade-off: waiting means property prices may move while you save, while paying LMI adds to your debt and interest.

If you are buying your first property, our first home buyers page covers the options and support that may apply to you.

Why Does Pre-Approval Expire, and What Happens If It Does?

Pre-approval is time-limited, and the period depends on the lender. If it expires before you find a property, you may need to reassess, and the lender can review your finances again.

This matters because your circumstances can change in that time. A new loan, a pay change or higher living costs can affect the outcome. If you are still searching, keep your finances steady and check the expiry date with your broker so you can renew in time.

A useful habit is to keep your savings pattern consistent while you search. Regular, visible saving over several months shows lenders a track of reliable behaviour, and it helps if you need to renew.

Getting Pre-Approved as an Ocean Reef Buyer

Our Ocean Reef mortgage broker page outlines how we can help with your application.

We can access home loan options from a panel of lenders, so you are not limited to one bank's policies. If you already own a home and are thinking of changing lenders, a loan health check is a good place to start.

Before you apply, speak with a broker about which lenders suit your income type and savings. Call one of our team or book an appointment at a time that works for you, and we will walk you through your pre-approval.

Frequently Asked Questions