Pre-approvals in a rising interest rate market.

The current lending market is a moving feast, and very challenging to keep up with – especially when you’re actively looking for your new home.

You’re no doubt aware of the interest rate changes but behind the scenes there are other factors at play including:

The interest buffer banks apply when assessing your loan – banks assess your loan using an “assessment rate” set at whichever is higher of,
a “floor rate” they set in their internal policies
or your actual interest rate plus a buffer of 3% to hopefully prevent you being unable to make your repayments in future.
What this does mean though is that as interest rates increase, so does the “assessment rate” they use to determine your affordability
Additionally, banks us a measure called HEMS which is essentially an average living expense for a household of your size with your income in your suburb, and whichever is higher of this figure or your actual living expenses is added into their calculations. Each quarter the HEMS data is updated and current increased prices means a significant increase in this base line average. The latest batch of HEMS results was brutal and wiped approx. $20,000 - $50,0000 off borrowing capacity in our calculations.
Thirdly, changes in your own financial position have an impact, for example casual workers who aren’t currently getting as many shifts as previous; new finance commitments, or any other change in your circumstances can have an impact if the banks decide to reassess your loan.

Separately, with interest rate increases you also need to consider how comfortable YOU are with your repayments at the new interest rates.

The policy banks regarding preapprovals isn’t universal, while some are honouring the original assessment, others are not and are re-assessing based on the current situation when you find a home.

What this means to you is;

If you were preapproved for a maximum and you have no intentions of spending that much – cool, it may not have any impact at all
If you’re preapproval was the maximum with that lender, there may be others who can consider you for more if need be so we switch lenders in time
If you were preapproved for a maximum and it really was the top end of your budget in the bank (or your) eyes – we can re-run the numbers or check in with the lender for any change
And be really aware of when the preapproval expires because new policy definitely applies for any extensions
When you find a place you love – please check in with us and confirm your preapproval hasn’t changed before paying the deposit, or, check in frequently while you are looking. We are reaching out where we can to existing preapproval clients but it’s hard to know what you’re looking at and if there’s any impact.

Lastly, if the media is correct the correlation between these reduction in loan amounts means a drop in the actual purchase price you’re paying. Across our desks we’re seeing mixed results – a few bargains and a few record prices, but you definitely are benefitted by changing your stance with your negotiations. Your language with the agents is likely to be around uncertainty, not stretching your budget and not paying what you feel is top dollar for the home.

If you have any concerns, any at all – please call us to chat