Home loan pre-approval: how much should I ask for?

20th Apr, 2018 | First Home Buyer, Investor

In this article:
What’s the magic number when seeking pre-approval for a home loan?

Do you want to get pre-approved for a home loan so you can start house hunting, but you’re not sure how much to ask for? Perhaps you’re worried that if you ask for too much, your pre-approval will be rejected. Or if you too low,  you won’t find a home you can afford.

Thankfully there’s a middle ground. The point of the pre-approval process is to form a clear understanding of how much money you can afford to spend on a property. Lenders assess your financial situation and give you conditional approval for an amount to borrow, enabling you to start house hunting in earnest.

Advice from a trusted and experienced mortgage broker will help you work out where you stand and what would be a good amount to borrow. Your broker should explain to you how important it is to only go to a limit you can comfortably afford.

Here’s what else a good broker should advise when it comes to helping you define how much to borrow:

Use a borrowing power calculator – but remember it’s only a guide

These online buying calculators are a popular way for Australians to get an idea of their borrowing power.

Expect a series of questions about income and expenses. From here, the calculator will display a figure for how much the lender may be prepared to let you borrow and an estimate of monthly loan repayments.

Although this figure is only a rough guide, it will prompt you to think about what you would be comfortable paying.

Keep in mind that the estimate from a calculator is often more generous than what you’ll get from a lender. Calculator formulas don’t usually contain the same level of detailed assessment of income, credit score and expenses.

Take the time to look at your financial commitment

Don’t forget the added costs that come with buying a house.

Before you see a mortgage broker, make a detailed list of all your financial commitments. Itemise all your living expenses such as grocery, electricity, rent and non-essential items like dining out.

Go through your bank statements for the last three to six months. Many bank accounts now provide automatic categorisation so you can easily see where your money is being spent.  Lenders may want to compare what you have declared as living expenses, to what your bank statements show.

When calculating how much you can comfortably afford to repay on a home loan each month, don’t forget to consider the added costs that come with buying a house. These include stamp duty (if applicable), solicitor’s fees, pest inspections, valuations and insurance – plus a buffer in the case of rate rises.

Get it right from the start with professional help.

Research real estate

A simple change of address without updated details can result in lost super.

The more property research you do, the better. It will help pinpoint what properties suit your lifestyle, budget and goals – ensuring you get a solid idea of how much you’ll need.

Many house hunting websites provide suburb-specific reports and price estimate tools. Look at sales prices of similar properties and consider the demographics of the suburb and the availability of local amenities.

Yellow Brick Road advisers have access to specific property analysis tools like CoreLogic RP Data. These allow us to source the most up-to-date market information, including median prices, rental yield, growth rates, suburb trends and demographic insights. Speak to us about how we can assist with your property research.

Avoid too many pre-approval applications

Too many pre-approval applications in a relatively short period of time are not viewed favourably by lenders and can impact your credit rating.

With the help of a professional mortgage broker, you can get your pre-approval application right the first time. Brokers have access to multiple lenders and we will take the time to determine which lender best suits your circumstance.