How Reliable is your Loan Pre-approval?

As you may be aware, banks have been tightening lending policy over the last few years. As a result, many of the loans that had been pre-approved and subsequently expired, will now not meet minimum lending criteria. Not only are the banks under continuing pressure to tighten up lending practices, but the government is facing calls to slow the upward spiralling property market in Sydney.

Some of the changes include:

Reduced LVR (Loan to Value Ratio) policy. This means that a client with 10% may now need to contribute a further 2 - 3 % to cover the Lenders Mortgage Insurance Premium. This means that instead of lending to 92% inclusive of LMI, new policy is 90% inclusive.

Increased Benchmark Rate. The benchmark rate is the interest rate that the banks use to calculate the client's ability to service the loan (typically 7 - 7.25%). This is designed to provide a buffer to ensure that should rates increase to over 7% the homeowner will be able to afford the repayments. Unfortunately, if your circumstances remain the same, your borrowing capacity has now reduced.

Valuation shortfalls. With many areas in the Sydney basin seeing softening sale prices, valuations are also coming in lower than they were 12 months ago. This particularly affects construction lending where unregistered land is pending settlement, and the values have reduced since contracts exchanged.

Postcode Restrictions. Many banks have recently introduced Postcode Restrictions. This refers to areas that the bank now perceives to be in a declining value area, or perhaps they bank has an over-exposure to the suburb (they have financed too many loans in the area).

Pre-approvals may not be renewed if one or more of these points apply to your loan pre-approval. As mentioned, these changes are mostly affecting developers, or people who have purchased off plan, or in new suburbs where the land is yet to be registered.

Fortunately, in most cases there are options available. So if you, or one of your clients, now find yourself with a looming settlement and a pre-approval that is not able to be renewed, give me a call to discuss the options available.