Home loan pre-approval in Australia: what it is and isn't

What pre-approval is

The NSW Government explains that pre-approval “lets you know your borrowing capacity and how much you can spend on a property”. It is optional, but it helps you budget and shows sellers you are serious. South Australia’s Government home-buyer site defines conditional approval as meaning that the lender “has assessed you and your suitability as a borrower”.

To give it, the lender checks your finances and assesses whether you will be able to repay a loan. Federal responsible lending law requires lenders and brokers to make reasonable inquiries about your situation and to verify it, so expect to answer detailed questions and to supply evidence. That assessment also applies the APRA buffer: see the serviceability buffer guide.

Applying involves a credit check, and the NSW Government warns that multiple applications could affect your credit score.

What pre-approval is not

• Not a guarantee of a loan. The NSW page states: “Getting pre-approval is not a guarantee that you will be approved for a home loan.”
• Not approval of the property. Once you find a home, the lender must give full or unconditional approval, which includes a property valuation. In South Australia’s words, full approval also requires the lender to assess and verify the property.
• Not permanent. It expires, and the period depends on the lender. Check the date on your approval before you bid or sign.

How long it lasts

Use the date on your own approval letter, not these general figures. If the approval lapses before you find a home, ask the lender whether it can be renewed and what it will need again. The official pages we read do not set out a renewal process, so confirm the steps and any new credit check with the lender before you bid.

Pre-approval, auctions and cooling-off

How pre-approval fits with your purchase depends on the state and the sale method.

• Auctions. Consumer Protection WA states that auction purchases cannot be conditional on financing approval and that you cannot make your offer subject to conditions and pre-finance approval. It advises having pre-approved finance and not bidding above your finance limit. Check the rules for your state in the buying at auction guide.
• Private sales in WA. A buyer can make an offer conditional on loan approval (“subject to finance”), and must tell the seller or agent in writing if a loan application is approved or declined. WA also has no mandatory cooling-off period for real estate contracts.
• Cooling-off elsewhere. Queensland applies a 5-business-day cooling-off period to residential contracts but not to auctions, and a termination penalty of 0.25% of the purchase price applies if the buyer terminates. The ACT sets a cooling-off period ending at 5 pm on the 5th working day, with no cooling-off for auctions or tenders, and a 0.25% forfeit on rescission. A cooling-off period is not a substitute for finance approval: see the cooling-off period guide.

Getting from pre-approval to settlement

1. Get pre-approval and note its expiry date.
2. Have the contract checked by a conveyancer or solicitor before you sign: see contract of sale and exchange.
3. Ask the lender for full approval, which includes the property valuation.
4. Settle. See settlement and electronic conveyancing.

Which professional to consult

A mortgage broker can arrange pre-approval with several lenders and explain their expiry terms (mortgage brokers). A conveyancer advises on finance clauses and cooling-off in your contract (conveyancers).