With the recent Reserve Bank interest rate hikes now in place and banks passing on the majority of this increased cost of borrowing to you and me, the consumers, we have seen pre-qualified and genuine buyers become unstuck in recent weeks with the hammer dropping - the horrid finance decline letter! This is due to their existing pre-approval no longer being honoured by their selected bank. What you have been approved to borrow in past months may no longer be within the scope of your lenders offering today. So if you have been pre-approved in past months, it may now be the time to get yourself re-approved.
As a leading Perth property sales agency our statistics from August, 2022, show that approximately 7 out of 10 of our recently transacted properties are being constructed subject to bank finance approval. This is great to see as our buyers are encouraged to disclose where their finance is coming from and to take the appropriate steps to ensure that their deposit payment, and their credit score, is protected when buying property. Whether it is making an offer to buy their first home, their down-sizer (or right-sizer), home or their next blue-chip investment property, and no matter how experienced the buyer is, letting the seller and the agent know where your funding is coming from is important. And protecting yourself from the risk of a bank finance decline is paramount.
As real estate agents we not only work in the seller's best interest, but we are expected to show duty of care for the buyer in each transaction. Similar so your mortgage broker and bank lending officer. Together you are armed with a strong team to guide you through the process so be sure to take advantage of the free expertise around you.
Let's set the scene. The pre-approval that you have from 4 months ago says that the $500,000 you need to borrow to secure your new 2 bedroom city-fringe stunner is well within your reach. You have your pre-approval letter saved on your Iphone and you begin pounding the pavement on the weekend home open circuit, meeting and greeting us local agents every Saturday and most Sundays. We now know you on a first name basis. In and out of home open viewings you go to find the perfect pad, the one with the right coloured kitchen, the shade of timber flooring you like and if you are lucky that sought-after glimpse of the Perth city skyline, Optus Stadium or a slice of the Swan River foreshore. You found it! It is time to make an offer, subject to finance of course.
Your offer is accepted and the dream is coming true, only to discover that the pre-approval that you have from 3 months ago is no longer valid! A finance decline notice or letter of ineligibility from your broker is on its way and replaces the certificate of title that you planned to print out, frame and hang on your bedroom wall on settlement day. Heartbreak sets in and the champagne bottle stays on ice. But what went wrong?
With the recent 5 months of interest rate hikes by the Reserve Bank of Australia the cost of borrowing and serviceability requirements from your bank have changed quite a bit. It is not your income, your employment, your spending habits or the value of the property that has necessarily changed, but it is the cost of the bank to do business with you and their appetite to lend. It is also the amount that needs to be repaid each month for your prospective borrowings. For example, a 0.5% interest rate increase on a $500,000 loan could mean an additional cost of $146 in interest payable per month (estimated, based on a principal and interest loan, paid monthly on a 30 year mortgage). With successive 0.5% interest rate rises in recent months it is easy to see how what was affordable in Autumn may no longer be within reach in Spring.
So what do we recommend? Knowledge is power and being up to date on the latest changes in your borrowing power, interest rate offerings and bank lending policy is the key. Your trusted mortgage broker or bank lending officer will easily be able to recalculate your updated borrowing power as well as the new cost to you per month. If you have been pre-approved before then it is time to get re-approved today. Make the call or send your trusted mortgage specialist an email.
When it comes to buying property we all want the same result, to see you in your dream home. A finance decline is not only crushing for you but so too the seller and also for us agents. The champagne should be on us and we look forward to placing that SOLD sticker on the signboard with you (as well as snapping a quick sold selfie). It is true that us real estate folk aim to be match makers and definitely not heart breakers!
Brendon Habak - Selling Principal