Many property buyers think that “finance pre-approval” is the same as “approved finance”, leading some to come unstuck. We sort out the differences with Andrew Mirams.
Kevin: It’s such a confusing issue for buyers sometimes to understand exactly where they are with their finance approval or their finance request when they’re going to buy a home. Andrew Mirams from Intuitive Finance joins me to talk about pre-approval versus subject to finance.
Good day, Andrew. Nice to have you on the show again.
Andrew: Hi, Kevin. Yes, great to be with you.
Kevin: Now explain to me the difference: what is the process, and how can buyers get caught out with this issue?
Andrew: Yes, those are a great couple of questions and ones that often get very confusing where people talk about approvals subject to finance and then a pre-approval. This also varies across state to state, where in Victoria and Queensland you can negotiate terms and have subject to finance or pre-approvals, whereas in New South Wales, let’s say, once you exchange there’s no subject to.
I guess the key difference between the two is often someone who will negotiate subject to finance probably hasn’t done their finance approvals in advance. They’re walking down the street and they see a property and they go, “Oh that looks okay,” and all of a sudden, they find themselves in negotiations. Or they’ve had the thought about property or finance and then something comes at in the last minute and they think, “Hey I’d like to be involved,” but they haven’t done any of their due diligence with their finance. Are they applicable? Can they borrow? Can I borrow that amount? What terms, etc.?
If we look on the other side with a pre-approval, that’s where we’ve already done most of that due diligence. So, there’s been some work done on what a comfortable borrowing capacity is, what sort of purchase price you can target, what type of LVT – are you looking at 60%, 70%, 80%, or beyond that? Are you looking at principal-and-interest payments or interest-only payments and the rate differentials between all of that?
There’s a lot more due diligence going in to it with a pre-approval, and you know they’re all subject to just the property being acceptable and an evaluation being performed, that it’s fairly reliable that you can proceed with that purchase.
Kevin: So, in the event of someone going to bid at an auction, they have to go all the way through. The bank has to be quite clear about which property you’ve going to be bidding on.
I always think that a pre-approval is where someone sits down and they look at you as an individual, your income, and your ability to repay a loan. But then to go one step further, they then have to verify that you’re not paying too much for the property. Is that a fair assessment, Andrew?
Andrew: Yes, it is. Probably 999 out of 1000 that go to auction, they’re bought on the market. So, if it’s in competition, the market dictates a property’s value, and unless that’s really run out of control – and there are circumstances where that can happen – a valuation will generally come in on and around that number that’s being competed at auction.
Where you have a private sale, and even if the property is on the market and it’s negotiated off market, that’s where you can sometimes get some differentials between a valuation and what a property’s actual value is or what a client has paid for it.
But yes, you’ve done most of your due diligence. If it’s for an investment let’s say, as long as the numbers in rent return are within those boundaries that are set with your pre-approval, you can reliably proceed at an auction or with a purchase.
Kevin: I guess most buyers would want to put themselves in the strongest negotiating position, which is really where they don’t have to have any conditions on the contract. It can just be a cash unconditional contract.
How often in your experience, does that actually happen, though, Andrew?
Andrew: What you find, Kevin, with a pre-approval, it actually allows a lot of our buyers to negotiate. If you have two contracts sitting on your table to sell your property, Kevin, both at the same price, but one’s happy to go unconditional and one’s happy to sit conditional subject to finance – because still, things can go wrong with that one – which contract are you going to choose?
Kevin: Yes, what are you going to do?
Andrew: You’re going to take the unconditional every day, aren’t you?
Kevin: Yes, it’s like a bird in the hand, isn’t it?
Andrew: Absolutely. And this is where it’s a great tool to be able to negotiate. You can negotiate your terms. You might be able to negotiate a slightly lower purchase price. In that circumstance you might be able to negotiate $490,000 as the purchase price unconditional versus the $500,000 over there but there’s no guarantee. If that falls over, it’s very hard to get that other purchaser back in the market.
So, like you said, a bird in the hand is better than the one in the bush, Kevin. So, that’s where it can be a great tool knowing that you are pre-approved within those limitations.
Kevin: Yes. Just getting off the subject a little bit, but helping once again with negotiation, we talked there about finance and how powerful that can be if you have your finance in place. Time of settlement, is that varying much around Australia in terms of how quickly someone can settle if all the finance is right?
Andrew: Yes. Settlement can happen, if you’re paying cash, as short as seven days if everything can be done within that time. That’s probably unusual. We’ve been involved with some that have done 14 or 21 days with getting loan documents out and back, etc.
Fairly traditional in Queensland is a 30-day settlement. Everything is negotiable but that would be the norm in Queensland. In New South Wales, the norm would be a 42-day or a 6-week settlement. And in Victoria, it ranges everywhere from 30, 60, 90, we’ve had a 12-month settlement, 180 days, so six month settlements, all sorts of things.
There seems to be a lot more flexibility in settlement terms in Victoria than probably the other couple of states. It’s not to say that they can’t be negotiated; everything in life is negotiable, Kevin.
Kevin: Absolutely, mate. It certainly is.
Andrew, it’s always great talking to you, mate. Thank you very much. Andrew Mirams, of course, from Intuitive Finance. And we had a really good look there at pre-approval versus subject to finance. We also took you in to some settlement periods as well.
Andrew, great talking to you, mate. We’ll catch up again real soon.
Andrew: My pleasure, Kevin. Have a great day.