Getting a pre-approval
If you're filthy rich with a spare million sitting in the bank, you can skip this section. But for the rest of us, the first step before diving into house hunting is to talk to your bank or a mortgage broker and get a home loan pre-approval.
A pre-approval is a formal process where the bank assesses your finances and gives you a conditional lending amount. This tells you how much you can borrow—and ultimately, what your budget is. Keep in mind that pre-approvals come with conditions, so while they give you a solid starting point, they’re not a guarantee of final approval when you find a house.
Banker or Broker?
There’s no right answer, but the best approach is to speak to both and decide what works for you.
At this stage, I recommend reaching out to your current bank (if you like them). Banks are non-exclusive at this point, meaning you can compare options later. Brokers, however, often ask you to sign an exclusivity agreement, which locks you into using them for financing in exchange for their advice and service. This isn’t necessarily a bad thing, but make sure you understand the terms before committing.
All major banks have Home Loan Coaches or Mobile Mortgage Managers. These in-house experts know their bank’s products inside out and can offer tailored advice. My banker, Alex, went above and beyond to help me secure my first home—his speed and persistence made all the difference at auction.
Brokers, on the other hand, are independent and work across multiple banks. They earn a commission (typically around 0.85% of the loan) but can be useful because they understand different bank policies and can navigate tricky lending criteria. They can also act as a buffer between you and the bank—sometimes, it’s easier for a broker to explain that you will cut back on Uber Eats once you have a mortgage!
What do I need for a pre-approval?
Whether you go through a bank directly or use a broker, you’ll need to provide the same set of documents for the bank’s credit check to assess how much you can borrow. Here’s what they’ll want:
Your income: Have at least 3-6 months of payslips and your employment agreement.
Your household situation: Let them know if you’ll be flatting, have kids, or any other significant changes.
Current expenses: Be truthful about your spending habits; this gives the bank an idea of your outgoings.
How much you want to borrow: Plus, any assets or security you have, such as savings or other properties.
Once you provide this, the bank will issue a generic pre-approval for a set amount. This is conditional on several factors, which will be detailed in the pre-approval letter, but it essentially sets your maximum budget for a property—this amount plus your deposit.
When you find a property, the bank will reassess the house itself and provide a final lending amount based on that specific property. They do this to ensure you don’t overpay for a house (e.g., borrowing $1 million for a house worth $800,000) and to make sure the home isn’t going to be a money pit (e.g., leaky homes).
You only need one pre-approval to start your search, and remember, you don’t have to borrow from the bank that gave you the pre-approval. Keep in mind that pre-approvals can be changed or withdrawn, especially if your financial situation changes.
With pre-approval, you’ll receive a formal letter stating the amount you can borrow and the conditions attached. But remember, this is just a general amount—you still need to talk to the bank about each specific property before they finalize the lending.
Running the numbers
The banks are bound by regulation to ensure they lend responsibly to you and all other customers. The banks will factor in a lot of things, but these three are must-haves.
The LVR (Loan Value Ratio)
You’ll hear about “LVR” a lot, this standards for Loan Value Ratio. A LVR is the ratio of a loan amount to the value of the property being purchased. Lenders use LVRs to assess the risk of lending money for a property. To calculate LVR, pick a property and divide the loan amount by the property's value. This gives you the LVR percentage. Typically, banks are content when you have a 20% deposit and open doors for you. Anything less than 20% makes you a riskier proposition. Where possible aim for a 20% deposit to give you the best bargaining ability and for your own sanity. There are some exemptions to LVR rules, but remember, the rules are there to protect you.
DTI (Debt to Income Ratio)
A debt-to-income (DTI) ratio compares your total debt to your gross income and is a crucial factor that lenders use to assess your financial stability and ability to repay a loan. To calculate your DTI, add up all your debts, including the proposed loan amount, and divide that by your total income. If you have a partner, use both your incomes combined. Generally, banks will look for a DTI ratio of 6-7 times your income. Borrowing much more than that can make lenders hesitant, as it suggests you might be taking on too much debt compared to your earnings. Remember DTI is a Reserve bank of New Zealand lever that's pulled to ensure we keep the economy and borrowers safe. Too much debt compared to your income is generally a bad idea.
Free Cash Flow
The proper accountants might cringe at this terminology, but it gets the point across in a personal sense. When assessing your loan application, banks will closely examine your after-tax income, monthly subscriptions, and unavoidable expenses, leaving a buffer for any other minor costs. Essentially, they’ll calculate your savings, which will go toward your home loan.
For example, if you’re earning $4,000 after tax per month but spending $3,800, the bank will find it tough to justify lending you money for a loan with monthly repayments higher than $200. Your savings need to show enough room for these repayments, and if your income is mostly going out on expenses, it makes it harder for banks to approve you for a larger loan.
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