Navigating the property market can be daunting, especially for first-time property buyers. One of the key steps in securing an investment property is understanding the different types of financing approvals available. Two common terms that often pop up are 'pre-approval' and 'conditional approval.' While they may sound similar, they play distinct roles in your property purchasing journey.
What is Pre-Approval?
Pre-approval is essentially a preliminary assessment by a bank of how much they are willing to lend you based on the financial information you provide. This process does not link you to any specific property yet; instead, it gives you a ballpark figure of your borrowing capacity. Think of it as a green light that allows you to confidently start searching for properties within your budget. Most clients seek pre-approval before signing a conditional contract, which provides peace of mind knowing that the bank is likely to lend them money when the time comes.
Obtaining pre-approval is a smart move because it allows you to act quickly in a competitive property market. It also signals to real estate agents and sellers that you are a serious buyer, giving you an edge in negotiations.
What is Conditional Approval?
Once you have set your sights on a property and have signed an Agreement for Sale and Purchase (subject to due diligence including finance), you’ll need to transition from pre-approval to conditional approval. This is where your mortgage adviser liaises with the bank to convert your pre-approval into a conditional approval based on the specific property you wish to purchase.
Conditional approval is more specific and comes with a list of conditions that must be met before the lending can be finalised. These conditions typically include providing a signed sale and purchase agreement, an independent rental appraisal, a bank ordered registered valuation, and assurance that relevant insurances are in place. Your property must also have a Code Compliance Certificate to confirm it meets local building regulations and a Certificate of Title.
Understanding the Conditions
When you receive your conditional approval, it’s vital to read through the conditions carefully. They are there to protect both you and the lender, ensuring that you meet their lending criteria at the time of settlement. It's important to note that some conditions can be addressed immediately, while others may need to wait until closer to the settlement date.
At this point, you’ll also see the mortgage terms, including interest rates and whether the loan is principal and interest or interest-only. Don’t be alarmed if the repayment figures differ from those discussed with your mortgage adviser. The rates shown are standard carded rates, and you’ll have the opportunity to discuss your mortgage structure closer to settlement.
In summary, pre-approval is your initial step into the property market that gives you a clear idea of your borrowing capacity, while conditional approval is the next step that connects you to a specific property with defined conditions. For property buyers, financial advisers, and investors—whether first-timers or seasoned professionals—understanding these differences is crucial for a smooth purchasing experience.
By ensuring you have a solid grasp of pre-approval and conditional approval, you are better positioned to navigate the property landscape confidently and make informed decisions that align with your investment goals.
Ready to take the next step in your property investment journey? Connect with a financial adviser today to gain insights tailored to your unique situation and position yourself for success in the property market. Don't have a financial adviser, reach out to the team at equiti, and we can put you in touch with one of our partners. Happy hunting!