A pre-approved loan, also known as Approval-In-Principle (AIP) or Conditional Approval (yes, that’s 3 terms for the same thing! Not confusing at all!), is an indication from a lender about how much you can borrow before you start looking for a property. Different lenders might use different terms, but they all mean the same thing.

If a bank gives you a pre-approval quickly, it might not be very reliable. This is often called a System Pre-Approval, which means your application and accompanying paperwork still need to be checked by a credit assessor. Important checks like credit history, employment, and supporting documents are still pending. Using one of these to bid at an auction could be risky.

The more reliable type of pre-approval is a “Conditional Approval, subject to Contract + valuation”. This type takes about 2-10 business days as it involves a thorough check of your application by a credit assessor. They will look at your financial situation, documents like payslips and bank statements, employment status, and credit history. If there’s any queries that the credit assessor has, it will be addressed at the Pre Approval stage, not after you’ve found a property. They will approve your loan up to a certain amount, provided you find a property and its valuation meets their criteria.

Not necessarily. You can apply for a loan after finding a property, but getting pre-approved has several advantages:

• Know your budget: You’ll know exactly how much you can afford.
• Be ready to buy: You can make an offer on a property knowing your finance is sorted.
• Save time: You’ll focus on properties within your budget.
• Smooth process: Fewer chances of issues with the sale process.

With a pre-approved loan, sellers will take you more seriously, which might be the reason the seller chooses you, over another buyer. If you’re bidding at an auction, having a pre-approval (Conditional Approval subject to contract + valuation) means you can bid with confidence, knowing you have your finance as approved as it can be at this stage. Auctions are unconditional, so if you win, you must settle the purchase, and a pre-approval helps ensure you’re ready.

All loans are based on three key things:

Principal: The principal is the amount of money you borrow from the lender. It’s the foundation of your loan and determines your repayment amounts. The larger the principal, the higher your monthly repayments will be. It’s crucial to borrow only what you need and can afford to repay comfortably, also taking into account possible future interest rate increases.

Interest: Interest is the cost of borrowing money, calculated on the outstanding principal. It’s expressed as a percentage rate, and it can significantly impact the total amount you repay over the life of the loan. Interest rates can be fixed, variable, or a combination of both, each with its own pros and cons. Understanding how interest is calculated and how it affects your repayments is essential for managing your loan effectively.

Serviceability: Serviceability refers to how much the lender believes you can afford to borrow based on your financial situation. This includes your income, living expenses, existing debts, and overall financial health. Lenders use serviceability assessments to ensure you can comfortably meet your loan repayments without undue financial stress, by applying a buffer of around 3% to the actual interest rate that you’re applying for. This is so the lender knows that if rates were to go up by 3% you can still afford the loan repayments. It’s a key factor in determining your borrowing limit and loan approval.

There are many types of loans with different features, so it’s important to understand your options to make the best decision. Some loans offer flexible repayment options, while others might provide offset accounts or redraw facilities. Fixed-rate loans offer stability, while variable-rate loans can offer savings if interest rates decrease. By understanding the basics of principal, interest, and serviceability, you can better navigate the loan landscape and choose the option that best suits your financial needs and goals.