Pre-Approval

Pre-Approval (also called conditional approval or approval-in-principle) is when a lender assesses your financial situation and confirms how much they're willing to lend you before you find a property or asset. It gives you a clear budget and demonstrates to sellers that you're a serious, qualified buyer.

How Pre-Approval Works

What Lenders Assess

Income:

• PAYG employees: Last 2 payslips + employment letter
• Self-employed: Last 2 years tax returns + ATO Notice of Assessment
• Rental income: Rental statements (lenders count 70-80% of gross rent)
• Investment income: Dividend statements, interest income

Expenses:

• Living expenses (HEM benchmark or actual spending)
• Existing debts (credit cards, loans, HECS/HELP)
• Dependents (childcare, school fees)

Credit history:

• Credit score check (hard inquiry)
• Review repayment history, defaults, inquiries

Example assessment:

• Household income: $180,000/year ($15,000/month)
• Living expenses: $4,500/month
• Credit card limits: $30,000 (minimum payment ~$600/month counted)
• HECS debt: $25,000 (reduces borrowing capacity by ~$5,000)
• Credit score: 765 (very good)

Result:

• Pre-approved for: $750,000 at 6.1% p.a.
• Max LVR: 90% (with LMI)
• Valid for: 90 days

Pre-Approval vs Unconditional Approval

Pre-Approval (Conditional)

What's assessed:

• Your income and employment
• Your expenses and debts
• Your credit history

What's NOT assessed yet:

• The specific property (valuation, condition)
• Final contract of sale
• Updated financials at settlement

Conditions to satisfy later:

• Property valuation confirms value
• Building/pest inspection (satisfactory)
• No change to employment or income
• No new debts taken out

Example:

• Pre-approved: $600,000
• Find property: $580,000 purchase price
• Submit to lender for final approval
• Lender values property at $580,000 ✓
• Building inspection: Minor defects only ✓
• Employment still stable ✓
• Unconditional approval granted

Unconditional Approval

All conditions satisfied:

• Property valued and approved
• Contracts exchanged
• Ready for settlement

Timeline:

• Pre-approval: Day 1
• Find property: Day 30
• Submit for unconditional: Day 35
• Unconditional approval: Day 42
• Settlement: Day 72

Benefits of Pre-Approval

1. Know Your Budget

Don't waste time looking at properties you can't afford.

Example:

• You think you can borrow: $800,000
• Pre-approval reveals: $650,000 (due to HECS debt and credit card limits)
• You adjust your search to properties under $650,000, saving weeks of wasted inspections

2. Negotiate with Confidence

Sellers and real estate agents take you seriously.

Example:

• You attend auction with pre-approval for $750,000
• You bid $720,000
• Agent knows you're qualified (shows pre-approval letter)
• Seller accepts your offer over another bidder who hasn't been pre-approved

3. Move Quickly at Auctions

Auctions require unconditional purchases on the day. Pre-approval lets you bid with confidence.

Example:

• Auction property: $680,000 reserve
• You have pre-approval for $750,000
• You bid $690,000 and win
• Contract signed same day (unconditional)
• Without pre-approval: You'd need finance clause and risk losing to another buyer

4. Strengthen Your Offer

In competitive markets, sellers prefer buyers who are pre-approved.

Example:

• Property: $850,000 asking price
• Offer A: $860,000, no pre-approval, 30-day finance clause
• Offer B: $850,000, pre-approved, 14-day settlement
• Seller chooses Offer B (lower risk, faster settlement)

5. Lock In a Rate (Sometimes)

Some lenders let you lock in an interest rate for 90 days.

Example:

• Pre-approval: 6.0% p.a. rate locked for 90 days
• During 90 days: Rates rise to 6.5% p.a.
• You settle at 6.0% p.a. (saves $2,500/year on $500K loan)

Pre-Approval Timeline

Typical Timeline: 2-7 Days

Day 1: Application

• Submit income docs, ID, bank statements
• Time: 1-2 hours

Days 2-3: Assessment

• Lender reviews financials
• Credit check performed
• Automated serviceability calculations

Days 4-5: Conditional Approval

• Lender issues pre-approval letter
• States borrowing capacity, rate, conditions

Fast-track lenders:

• Some lenders (especially online/non-bank) give pre-approval in 24-48 hours

Example:

• Monday 9am: Submit application via NIK Finance
• Tuesday 3pm: Lender requests extra payslip (recent job change)
• Wednesday 10am: Submit additional docs
• Thursday 2pm: Pre-approval granted for $620,000 at 5.9% p.a., valid 90 days

How Much Can You Borrow? Pre-Approval Calculation

Serviceability Formula

Lenders use a formula to calculate maximum borrowing:

(Income - Expenses - Other Debts) × Serviceability Buffer

Serviceability buffer: Lenders test if you can afford repayments at your rate + 3% (stress test).

Example 1: PAYG Couple

Income:

• Applicant 1: $120,000/year
• Applicant 2: $80,000/year
• Total: $200,000/year ($16,667/month)

Expenses:

• Living costs (HEM for 2 adults): $3,200/month
• Credit card limits: $20,000 (min payment ~$400/month)
• No other debts

Calculation:

• Gross income: $16,667/month
• Less expenses: -$3,200
• Less credit card: -$400
• Net available: $13,067/month

Serviceability test:

• Lender tests at 6.0% + 3% buffer = 9.0% p.a.
• $13,067/month can service: ~$625,000 loan at 9% stress rate
• Pre-approved amount: $625,000 at actual rate 6.0% p.a.

Reality check:

• Actual repayment at 6.0%: $3,730/month
• Stress test repayment at 9.0%: $5,030/month
• Net income available: $13,067/month
• Comfortable buffer maintained

Example 2: Self-Employed Individual

Income:

• Tax return (2023): $140,000
• Tax return (2024): $160,000
• Average: $150,000/year (lenders average 2 years)
• Monthly: $12,500

Expenses:

• Living costs (HEM for 1 adult): $2,100/month
• Car loan: $600/month
• HECS debt: $40,000 (reduces capacity by ~$8,000)

Calculation:

• Gross income: $12,500/month
• Less expenses: -$2,100
• Less car loan: -$600
• Net available: $9,800/month

Serviceability test at 9% stress rate:

• $9,800/month services: ~$470,000
• Less HECS impact: -$8,000
• Pre-approved amount: $462,000 at 6.2% p.a.

Pre-Approval Validity Period

Typical validity: 90 days (3 months)

Some lenders offer:

• 60 days (shorter)
• 120 days (longer, for new builds)

What Happens After Expiry?

Option 1: Renew Pre-Approval

• Submit updated payslips/bank statements
• Lender re-assesses (usually quick, 1-2 days)
• New pre-approval issued

Option 2: Apply with New Lender

• If rates have changed, you can shop around
• New credit inquiry recorded

Example:

• Pre-approval: March 1 at 6.0% p.a., expires June 1
• May 25: Still searching for property
• May 30: Request renewal, submit latest payslip
• June 3: Renewed for another 90 days (new expiry: September 3)

Pre-Approval for Different Loan Types

Home Loans

Most common use case.

Pre-approval includes:

• Borrowing capacity ($X amount)
• Interest rate (e.g., 5.9% p.a.)
• LVR (e.g., up to 90%)
• Loan features (offset, redraw)
• Validity period (90 days)

Investment Property Loans

Similar to home loans but:

• Rental income assessed (70-80% of gross rent counted)
• Slightly higher rates (0.2-0.5% p.a. above owner-occupier rates)
• May require larger deposit (10-20% vs 5-10%)

Example:

• Investment property pre-approval: $450,000
• Expected rent: $2,400/month
• Lender counts: $1,920/month (80% of rent)
• This boosts borrowing capacity by ~$100,000

Car Loans

Less common but available.

Pre-approval for:

• Amount: $60,000
• Rate: 7.2% p.a.
• Term: Up to 7 years
• Validity: 30-60 days (shorter than home loans)

Use case:

• Shopping for luxury car ($50K-$70K range)
• Pre-approval shows dealers you're serious
• Can negotiate price knowing your budget

Commercial/Business Loans

Pre-approval based on:

• Business financials (profit/loss, balance sheet)
• Personal financials (director guarantees)
• Business plan (for startups)

Example:

• Business owner pre-approved for $800,000 commercial loan
• Uses pre-approval to make offers on commercial properties
• Can move quickly when right property appears

What Can Void Your Pre-Approval

1. Change in Employment

Scenario:

• Pre-approved while employed at Company A ($120K salary)
• Change jobs to Company B ($130K salary)
• Pre-approval may be voided (even with higher salary)
• Lender requires 3-6 months employment history at new job

Solution:

• Notify lender immediately
• Provide new employment contract
• May need to re-apply

2. Taking on New Debt

Scenario:

• Pre-approved for $600,000 home loan
• Buy a $50,000 car on finance before settlement
• Pre-approval voided (new debt reduces borrowing capacity)

Example:

• Original pre-approval: $600,000
• New car loan: $50,000 ($800/month repayment)
• Borrowing capacity drops to: ~$520,000
• You can no longer afford the property you've purchased

Rule: Don't take on ANY new debt between pre-approval and settlement.

3. Credit Score Drop

Scenario:

• Pre-approved in January
• Miss credit card payment in March (30 days late)
• Lender re-checks credit before settlement
• Pre-approval at risk (credit score dropped 50 points)

Solution:

• Pay everything on time between pre-approval and settlement
• Avoid maxing out credit cards

4. Property Valuation Lower Than Purchase Price

Scenario:

• Pre-approved for $700,000 (90% LVR)
• Buy property for $650,000
• Lender values property at $600,000
• LVR is now 108% (not 90%)
• Lender may decline or require larger deposit

Example:

• Purchase price: $650,000
• Lender valuation: $600,000
• At 90% LVR, lender will only lend: $540,000
• You need to find extra $110,000 (originally needed $65,000 deposit)

How to Get Pre-Approved

Step 1: Gather Documents

PAYG employees:

• Last 2 payslips
• Employment letter (confirming role, salary)
• 3 months bank statements
• Photo ID (driver's license, passport)

Self-employed:

• Last 2 years tax returns
• Last 2 years ATO Notice of Assessment
• Business financials (profit/loss, balance sheet)
• 6 months business bank statements
• Personal bank statements (3 months)
• Photo ID

Everyone:

• List of assets (savings, shares, property)
• List of liabilities (debts, credit cards, loans)

Step 2: Apply Online or Via Broker

Direct to lender:

• Apply on lender's website
• Takes 1-2 hours
• Get response in 3-7 days

Via broker (NIK Finance):

• Broker submits to multiple lenders
• Finds best rate and features
• Handles paperwork
• Faster approval (2-5 days)

Example:

• Apply via NIK Finance Monday morning
• Broker submits to 3 lenders
• Tuesday: Lender A declines (high LVR concern)
• Wednesday: Lender B offers $580,000 at 6.3% p.a.
• Thursday: Lender C offers $620,000 at 5.9% p.a. ✓

Step 3: Receive Pre-Approval Letter

Letter includes:

• Approved amount
• Interest rate
• LVR (maximum)
• Conditions (property valuation, employment verification, etc.)
• Expiry date

Example letter:

ABC Bank Pre-Approval

Applicant: John & Jane Smith
Approved Amount: $650,000
Interest Rate: 5.89% p.a. (variable)
Maximum LVR: 90%
Loan Term: Up to 30 years
Features: Offset account, unlimited extra repayments

Conditions:
- Property valuation satisfactory
- No change to employment
- No new debts incurred
- Satisfactory building/pest inspection

Valid Until: 15 August 2025

This pre-approval is subject to final credit assessment and property valuation.

Step 4: Start Property Hunting

With pre-approval in hand:

• Search properties within budget
• Attend auctions confidently
• Make offers quickly
• Show sellers/agents you're qualified

Final Thoughts

Pre-approval is essential for serious property buyers:

• Know your budget (don't waste time on unaffordable properties)
• Negotiate confidently (sellers take you seriously)
• Move quickly (critical for auctions and competitive offers)
• Lock in rates (if rates are rising)

Get pre-approved before you start property hunting:

• Apply via NIK Finance to compare 100+ lenders
• Get approved in 2-5 days
• Valid for 90 days
• Free service (NIK Finance brokers are paid by lenders, not you)

After pre-approval:

• Don't change jobs
• Don't take on new debt
• Keep paying everything on time
• Find your property within 90 days

The difference pre-approval makes:

• Without: Spend months looking, make offers, then find out you can't borrow enough
• With: Know exactly what you can afford, move quickly, win in competitive markets