Do you know how much banks are willing to lend to you? Or how much you can afford to borrow for a home loan? These are the few things every first home buyer needs to know before applying for a home loan.
Securing mortgage pre-approval is one of the most crucial steps in your home-buying journey. Why? It provides a clear understanding of your borrowing capacity, giving you confidence to make informed decisions when house hunting.
Before lending to you, lenders will calculate your serviceability and loan-to-value ratio (LVR).
Serviceability refers to your ability to repay your loan. While each lender uses a slightly different method to calculate serviceability, all rely on factors like your income, expenses and level of debt.
As a basic calculation, lenders will add your net income, subtract your living expenses and debt, and use the balance to determine whether you can afford your home loan repayments. Lenders may also add an interest rate buffer to their assessment to ensure that you can service the loan even if interest rates go high in the future. After all, the rates will almost certainly rise and fall during your mortgage.
Your deposit is an important part of this calculation, and lenders will use your deposit amount to determine your loan-to-value ratio (LVR). LVR is calculated by dividing the amount of the loan (less your deposit amount) by the value of the property expressed as a percentage.
For home buyers, an LVR of 80 per cent is usually required, which means you need to have 20 per cent of the property’s value saved as a deposit. (Other deposit options are available to first-home buyers who don’t have a 20 per cent deposit saved up, so don’t despair if you’re struggling to reach that magic number!)
For example, if the property is worth $500,000 and you have a deposit of $100,000, your LVR is 80 per cent ($500,000 less $100,000 divided by $500,000).
While it is still possible to buy a first home with a lower deposit, LVR restrictions imposed by the Reserve Bank of New Zealand can mean lenders are limited in the amount of high LVR lending they can do. They may also charge additional fees for high LVR lending, like Lenders’ Mortgage Insurance (LMI). LMI is a set dollar amount or a percentage of your loan amount that lenders charge as insurance to protect themselves against potential mortgage defaults.
Applying for mortgage pre-approval is a good idea before you head out shopping for a new home.
A mortgage pre-approval is a conditional agreement from a lender confirming the amount they’re prepared to lend to you, provided you meet the conditions of the agreement. Conditions might include getting a registered property valuation from an approved registered valuer.
With pre-approval, first-home buyers can house hunt with confidence, knowing they can secure financing up to a certain amount. Mortgage pre-approvals typically last for 60-90 days, and it’s essential you have pre-approved finance in place if you plan to buy a home at auction.
It’s also a handy tool when negotiating with vendors once you find a home you want to buy. With a mortgage pre-approval in place, you’re in a strong position to negotiate, and you can move quickly to finalise the property sale, knowing that finance is already pre-approved.
However, remember that being ready for a mortgage involves much more than just qualifying for a loan. Paying off a mortgage takes years, and you must be sure you can keep up with your mortgage repayments while still managing your expenses. Before signing a mortgage contract, make sure you understand what you are committing to and whether it’s right for you. Talk to Max Mortgages to help you better understand the potential risks and disadvantages of different mortgage options so you can make better and well-informed decisions on home loans!
Take the first step toward your dream home. Secure your mortgage pre-approval with expert guidance. Our experienced advisers will guide you through every step, ensuring a smooth and transparent process. Let our experienced advisers help you understand your borrowing power and streamline your journey.
Get in touch with the team at Max Mortgages if you have questions about home loans and pre-approvals for first-time buyers. Simply request a call with one of our Mortgage Advisers to find out how much you could borrow and how to apply for mortgage pre-approval.
A pre-approval, also referred to as “conditional home loan approval”, does not guarantee a home loan, but it indicates that a lender is willing to approve a loan for a certain amount, provided that all required conditions are met. Final approval, however, depends on the lender's assessment of the specific property you intend to purchase and verification that all other conditions are met.
In New Zealand, a home loan pre-approval typically lasts for 60 to 90 days, depending on the lender. If you haven't found a property within that time frame, subject to the lender's policies, the conditional approval may be extended for another 60 to 90 days, provided your situation hasn't changed. Otherwise, you may need to reapply to ensure your financial situation still qualifies.
For a home loan pre-approval, you will usually need proof of income, bank statements, identification documents, and details of any existing debts or financial commitments.
Yes, you can make an offer without a pre-approval, but it's risky. Having a pre-approval gives you confidence that a lender will likely approve your loan up to a certain amount, giving you a clear budget to work with and ensuring you focus on properties within your financial reach. This also signals to sellers that you are serious about buying and financially prepared, strengthening your position in negotiations, especially in a competitive market. Pre-approval can also help speed up the buying process, preventing potential delays once you are ready to move forward with a purchase.
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