Home Loan Approval
- What Is a Pre-Approval and Why It’s Important?
- Why Would I Use Mortgage Broker?
- How Does a Mortgage Broker Get Paid?
- How Do I Choose the Right Mortgage Broker?
- Things to Consider When Choosing Banks
- Loan Structure
- Information to Be Provided
- Finance Process
What Is a Pre-Approval and Why It’s Important?
A home loan pre-approval is approval in writing from a lender that outlines how much you can borrow to meet specified conditions. Please note, when the bank issues a pre-approval letter, they have not evaluated the acceptance of the property you are looking to buy; therefore, even if you have pre-approval in place, you still must get written confirmation from the lender, confirming they are happy with the property you want to buy.
Pre-approval from the lender gives you the confidence of your borrowing capacity and property budget and what conditions you must meet before taking out a home loan. Once you have that in hand, you will know where to look and what type of property you can afford, etc. When you are interested in buying a particular property, all you need to do is contact the bank or your broker to make sure the property can be accepted by the lender (for straightforward sale and purchase agreement, the acceptance can be known within the same day), and if you have no other financial conditions to be met or you’re confident to meet the conditions (e.g., cancelling credit card), then you may want to make an unconditional purchase offer, which gives you bargaining power over other buyers. It’s also very important to have pre-approval before attending an auction because you simply can put no conditions if you buy via auction. If you don’t have pre-approval in place, there is a risk of not getting finance. You don’t want to be in that stressful situation and lose your hard-earned deposit.
What’s not covered in the pre-approval letter:
- Property acceptance by the lender
- Interest rate and cash back (these can only be negotiated once you have found the property and meet all conditions) Our advice is always obtaining a pre-approval before you start house hunting to remove the risk factors.
Why Would I Use Mortgage Broker?
It’s a very good question and we get asked that a lot. Let me explain.
When you think about getting finance, the two most popular channels you approach are banks (including branches, mobile mortgage managers) and mortgage brokers. The choice is yours.
In New Zealand, about 40% of home loans are written by mortgage brokers, and this number keeps growing. The main reasons people go to the mortgage broker for loans are:
- Mortgage brokers are not bank employees. Their job is to work on your behalf to find the best possible financial solutions to help you achieve financial goals. Unlike bank employees, they get paid salary (plus bonuses) for writing loans for that lender only, and they have a sales target.
- Mortgage brokers like us work with approx. 30 lenders and some lenders work exclusively with mortgage brokers, which means, if your bank declines your loan application, we are more likely to help you.
- Getting a good home loan approval outcome is not just about number or calculations. Lots of other things go into it, such as loan structure, legal structure, borrower character, repayment risk evaluation, etc. Good mortgage brokers can package your loan application to improve the chance of approval or get better outcomes, such as fewer approval conditions.
- Mortgage brokers like us are advice focused, not transactional (robots and banks can do as well). Although we only get paid by the lender if your home loan is settled, we spend lots of time (free of charge) during the consultation stage trying to help you become a qualified borrower sooner. We also hold your hand throughout the application process to help you remove any roadblocks and answer questions. Banks normally give you either an approval or decline outcome. There is nothing between.
- Mortgage brokers do all the legwork for you to evaluate lenders and loan products to ensure you have the best solution and price (interest rates and cash backs) and can save you the time and hassle of managing all those daunting details.
- Good mortgage brokers will continue service after loan settlement because it’s very important that your home loan and financial circumstances are reviewed regularly (at least every two years) to ensure they are still meeting your individual needs. Don’t put it away and forget about it for the next 25 or 30 years.
How Does a Mortgage Broker Get Paid?
Most of the time, mortgage brokers get paid a commission by lenders for their services after loan settlement. The commission varies from one lender to another. We can be liable for commission ‘clawback’ if the client repays their loans within 3 years.
Good mortgage brokers should work in the client’s best interest, therefore for choosing the best lender, it should NOT put their remuneration level into consideration. Sometimes, though, mortgage brokers must go to non-banks to deliver a solution. Generally, non-bank lenders do not pay; therefore, we must charge the client directly. If that’s the case, the broker should communicate this with the client upfront, leaving no surprise in the end.
How Do I Choose the Right Mortgage Broker?
Not all brokers are equal. Unfortunately, at the moment in NZ, the commission-only structure and low barriers to entry in the industry attract “a certain kind of person” who does not act professionally (it’s in the process of tightening, though).
We have listed some common attributes of a good mortgage broker. We hope they are helpful for finding a good mortgage broker.
- •Good brokers are solution focused, rather than laser-focused on price and loan amount. We are not saying the interest rate, etc., are not important. We don’t want our client to waste any of their hard-earned money, but only if the solution meets their needs and facilitates future goals. To provide a good solution, they must listen and ask lots of good questions to understand people’s situations and goals.
- •Good brokers should have access to at least 20 lenders to provide the best solutions. Just request a copy of their terms of engagement to see who they work with.
- •Good brokers should keep you up to date about your application process and respond to your questions.
- •Good brokers focus on relationships, not a transactional model. Once the loan is settled, they should continue to look after you for your loan review, refix, and keep regular contact. The reason they do these things is simply because these are important to you, so they should care!
- •Good brokers have strong relationships with lenders and understand how to package your application to get the best chance of approval with fewest approval conditions. Finally, we suggest you read other clients’ reviews and see what people say about them.
Things to Consider When Choosing Banks
- Existing relationship with the lender
- Credit Policies
- If the lender can maximise your borrowing capacity
- Approval conditions
- Branch network
- Online Banking
- Allowing for redraw
- Client service
- If the lender can support your future goals
- Lender’s capacity and appetite
- Lender’s turnaround time
- Interest rates and cash back, and fee charges
- Other features, such as the ability to make extra repayment, claw-back clauses, allowance for a second mortgage, etc.
1. Principal and Interest
Also called ‘table loan’, means your repayments stay the same over the term of the loan. You generally pay more interest at the start, so initially, you’re not building much equity (the amount you own) in your home. However, the balance changes over time, and later, you repay more principal than interest, and your equity builds faster.
2. Interest Only
It’s exactly as the name suggests - you only pay the interest with each repayment. The principal (the amount you borrow) must be repaid at the end of the loan term.
interest only terms are generally available up to two years for the purchase of an owner-occupied property and up to five years for the purchase of a residential investment property.
Interest only mortgage is commonly used by property investors, especially if they still have personal debt, such as their family home loan. It is mainly for tax reasons - interest costs generated from investment property debt are tax deductible. It makes perfect sense to consider paying off personal debt prior to paying off investment debt. Other reasons for investors to have interest only loans are so they can free up cash to purchase more properties and grow their property portfolio and gain wealth.
Some first home buyers have their home loan on an interest-only term because they want to take time to use the new debt repayment obligation. Normally, they take a year to adjust their lifestyle and then pay the principal. Occasionally, people change from paying principal to interest only because of experiencing financial hardship.
We recommend an owner-occupied property loan if you can afford to pay principal and interest. It’s the best way to save money.
3. Revolving Credit
It’s like a large overdraft, with Revolving Credit your pay goes into your account, and your bills and home loan repayments are made from this account. You can also use a credit card to pay for your day to day expenses and bills. As long as you repay the outstanding balance on your credit card monthly, there will be no interest charges on your credit card. Revolving credit loans Limits can either be reducing or non-reducing.
There are no set principal repayments (on non-reducing), which provides flexibility. However, it requires a disciplined borrower to reduce the amount owing. It works work well for an owner-occupied loan when the borrower has a strong cash surplus.
Funds held in savings accounts can be used to offset the balance in your offset mortgage account. You pay interest on the difference. e.g. If your offset mortgage balance is $50,000 and you have $10,000 in savings accounts you will pay the loan interest on $40,000. The offset mortgage is a floating or variable rate. You can have up to 8 savings account balances linked (the cumulative balances of up to 8 accounts). There is no credit interest paid on the savings account balances if they are linked to the offset mortgage account. You can link savings accounts in your partner's name and your children’s names. Offset loans can have either interest only or Principal and Interest repayments.
If you like separate accounts for savings, then this account could save you interest on your mortgage. Remember – this account is not like a revolving credit account where you can apply for a limit as a buffer to be used later. The whole loan balance is advanced when loans are initially drawn down.
Information to Be Provided
It depends on your circumstances and loan application purpose and if you have an existing client of the lender you are looking to apply with. We will provide you a personalized information list after we understand your situation. Generally, these documents are commonly required.
Application Form – Prosperity Finance Application Form has only two pages and we can always help you interpret if required.
Last 3 months bank statements to show your income coming into your bank account, and your day-to-day expense account to see your spending pattern and account conduct. It’s critical to have clean statements which mean free of any unauthorised overdraft and dishonours.
Last 3 payslips (and other proof of income, such as last 2 years financials if self-employed).
Proof of deposit - such as last 3 months savings history, and if you are using Kiwisaver then KiwiSaver withdrawal amount confirmation and KiwiSaver HomeStart approval letter are required.
Last 3 bank statements or financing statement for any existing debt (credit card, car loan, HP, etc) to confirm interest rate, loan term, loan balance and repayment history, etc.
Photo ID – such as passport or driver license. Address Verification - Bank statements showing address or utility bill held in applicant’s name.
If you are a first-time home buyer, you know how intimidating the process can seem. A Prosperity Finance, we’re here to make sure it’s a breeze.
The best place to start is with the discovery session to determine your borrowing power and what financial solution best suits your needs. Even if you are not qualified at this stage it does not matter. That’s why we are here. We will help you to fast track your progress to become a qualified borrower.
We then provide follow-ups – we make regular follow-ups with you to see how you progress and answer questions you may have.
Application Stage – this stage will kick off once you are ready to apply for a loan pre-approval. We help you with the forms, KiwiSaver, HomeStart and getting pre-approved. Then get guidance from us on the house buying process, placing offers and working through to an unconditional stage. Then we help negotiate rates and give you a personalized mortgage reduction plan. Our goal is not only to obtain the best possible approval outcome, but we are also advice focused, which means you will be empowered to make sound financial decisions and enjoy a stress-free journey. Post Settlement Stage – post loan settlement, we keep regular contact with you to find out how everything is going at your end and make sure the loan structures are still meeting your needs. We also assist with loan refix and advise on how to make good refix decisions, etc.
We have been using Connie and her team for two projects so far. The last one was for our family home upgrade. We received excellent results and in timely manner with a lot of useful information. I benefited from Connie’s personal approach and her advice that helped us make right decisions.
I will absolutely recommend Connie and her company. The Professionalism and guidance provided by her was outstanding. Also the friendly and helpful attitude of her team completed the picture of excellent service. I’m very satisfied.