Are pre-approvals really worth it?

The key to most property transactions comes down to a buyer's ability to secure finance. But over the past 12 months, as interest rates have risen against a backdrop of higher property prices, obtaining finance hasn’t always been easy. The first step most would-be buyers take is speaking to a mortgage broker and getting a pre-approval in place. However, are they really worth the trouble?

A pre-approval is simply a lender indicating they’d be willing to loan a certain amount to a potential buyer, based on a preliminary assessment of the buyer's financial circumstances. This can provide a degree of certainty and a clear budget guideline for buyers before they start house hunting.

However, it's important to remember that a pre-approval is not a guaranteed loan. It's a conditional offer subject to final approval, which occurs once a buyer chooses a property. The final approval is contingent on the lender's valuation of the property and any changes in the buyer's financial circumstances.

The issue many borrowers have is understanding that pre-approvals are conditional. There have been instances where pre-approved buyers have successfully bid at auctions, only to miss out when the lender's final valuation of the property falls short of the purchase price or their financial situation changes, resulting in the loan being denied.

This can also happen in a market where prices are rising rapidly. A lender's valuation may not keep pace with the latest selling prices, leading to a shortfall between the loan amount and the property's purchase price.

Despite these potential downsides, pre-approvals have a lot of merit. They provide a clear indication of your borrowing capacity, helping narrow down your property search and save time. This is more important than ever in a rising interest rate environment where borrowing capacity for most people is a lot lower than what it was 12 months ago.

Pre-approvals can also give you a competitive edge, particularly in private treaty sales, by demonstrating to the sellers that you are a serious buyer with finance readily available. The process of getting a pre-approval can also help identify any issues in your credit history that may hinder your loan application. It allows you time to rectify these issues before you find your dream property.

However, it's critical that buyers understand what a pre-approval does and doesn't cover, and to not overextend themselves financially based solely on a pre-approval.

It’s always best to keep clear lines of communication open with your mortgage broker throughout your property search, even after obtaining a pre-approval. Also, ensure that you keep them updated if your circumstances change or if there’s a long period of time between when you get pre-approved and when you are at the point of making an offer on a property.