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Why You Should Buy Now if You Are Pre-Approved for a Home Loan

With mortgage lending rates swiftly rising, those who are pre-approved for a new home loan are in a prime position to capitalise upon the current property market. If your pre-approval expires, the volatility in the lending industry will mean that your borrowing power becomes much weaker, well and truly quicker than the property market weakens. This is what you need to know.

Think of it this way. Say you were pre-approved for $1,000,000 in April 2022, prior to the interest rates rising in May 2022.  Your pre-approval is based on the fact that your financial or personal situations haven’t changed, and the pre-approval is conditional on you purchasing a property within 3 months (July 2022). Your expected monthly repayments prior to the interest rate change was $4513.00, however as interest rates have gone up, you know you will have to pay more, BUT you have the pre-approval, so you will take advantage of the urgency and worry about the extra payment requirements once you have settled. Now, say in that 3-month period, interest rates rise 1% (which is likely), so your monthly mortgage payments for Principal and Interest have risen to $5091.00. If you’ve purchased and your purchase has been approved, then great – you just have to able to keep your income at that higher rate, or even more. However, if you haven’t secured a property, then your ability to pay that extra 1% is taken into consideration, and the banks may only give you a pre-approval based on the original $4513.00 as your ability to pay off the loan,  therefore they may only offer you $885,000, instead of the original $1million. Just imagine if the interest rates go up 2%? This is the dilemma many Australians are currently facing as they have the desire to purchase, and can’t find the right property, or are constantly outbid on the properties they love. This could mean that home buyers will either need to reconsider the type of home they want to purchase, or reconsider the suburb in which they want to purchase.

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Let’s look at Penny and Chris. They are looking to be first home buyers around the St Kilda East area which is close to their workplaces and near the water which they love. They’re looking for a two bedroom apartment preferably with a courtyard for their dog. But agents are telling them there is still plenty of competition for two bedroom apartments with courtyards in St Kilda East, so prices are set to remain. They’ve attended auctions and missed out on various places, so they understand the harsh reality of the market. Faced with the prospect of an expiring pre-approval and potentially reduced buying power the next time around, the couple would need to think about more affordable suburbs such as Carnegie or Glen Huntly. This is the reality that is facing buyers currently, they either need to take the opportunity to purchase now, or risk having to settle for something that is in a different suburb or different style of property.

The reality is, as interest rates rise, so will the demands from mortgage lenders on home buyers. The rules will get tighter and tighter on their ability to be able to pay off their mortgage. While most in the industry see interest rates still ‘cheap’, the reality is, house prices and wages are in two very separate worlds and do not move up or down in the same space. Some people will be squeezed completely out of the home buying race, and be forced to rent for longer. So, while you may be hesitant in purchasing now, as the old saying goes, ‘strike while the iron is hot’, because real estate success is measured by ‘time in the market’, not ‘timing the market.’ It’s an important time to stay market aware, keep a track of listings online, attend inspections and auctions and get in touch with industry professionals. And while you believe that getting pre-approved will be easy, research from digital home lender Nano shows that one in five Australian homeowners actually missed out on a property due to a delay in their financing, showing that the rush for pre-approvals can reduce your ability to be confident in purchasing, which previously may not have been present.

From what we can see in the market at the moment, is that A-grade properties are still going well above their reserve, which is bucking the trend of what the media is saying and predicting. Those buying A-grade properties are paying the premium because they are generally already renovated with the latest trends, which is hard enough with the lack of building materials and excessive labour costs. Those buyers are in for the long haul – 7-20 years, knowing that even if property prices do go down in the short term, and their mortgage goes up, they will still see an increased property value when it’s time to sell. For instance, to the 10 years to October 2021, Melbourne property prices climbed 90.2%, while regional Victoria recorded 105.6% and Sydney an incredible 146.4% (Sydney Morning Herald). For those who buy with this vision, it’s the perfect time to ensure their pre-approval remains valid by purchasing now.

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For all those sitting on the fence, waiting to see what happens? You have to make the right decision for you, not the right decision based on the market. For a lot of people, renting is costing them more than a mortgage repayment, yet they can’t afford to save up for a deposit, and it’s only going get worse as the national vacancy rate sit low at 1% in May 2022 and rental demands stay high, so rents will only increase to make the struggle to buy a home even harder.

If you are currently pre-approved for a home loan, it’s good to weigh up your options, but the fact is, the reality of an expired pre-approval will be the detriment of your ability to purchase. For tailored advice on your situation, get in contact with one of our market specialists at Besser and Co.