Think carefully before using hard-earned equity from family home to fund a holiday home.
What is a loan pre-approval? Can you bid at auctions?
Auctions are the most transparent and efficient way to buy and sell property. The process is starkly public, taking place on the street for all to see. The market price is usually revealed under the hammer in open-cry competition between multiple prospective buyers. And with the contract signed by the winning bidder always unconditional, there is a high degree of confidence that settlement will be completed in a timely manner.
The benefits of this contractual absence of ifs, buts or maybes are not truly appreciated. For instance, in the UK, the property buying process can be painfully slow, due to a commonly inserted contract clause that a purchase is subject to the buyer selling their current property. Unfortunately, it is not unusual for a line of several transactions to be dependent on each other. Often described as the dreaded chain, a sale can fall through simply because there is a problem several ‘links’ away.
Australian banks have happily played their part in facilitating the auction process. The granting of loan preapproval to their customers has enabled millions of us to bid at auctions over several decades with the confidence that the finance will be forthcoming as long as we stay within the pre-agreed borrowing limit.
However, over the last couple of years the process has become more uncertain. Increasingly, finance-seeking customers are hearing and seeing the clause buy subject to finance coming either from their bank or from their mortgage broker. Naturally, many of these buyers have concluded that the clause precludes them from buying at auction.
In truth, pre-approvals have always been subject to finance, according to Stuart Wemyss, director of ProSolution Private Clients. “Banks pre-approve a borrower to the extent that the only conditional item is the valuation of the property,” he said.
In the past there was a high degree of confidence a bank’s post-purchase valuation would be a formality, and the rest of the finance application process would be straightforward. Broker nervousness today stems from three factors: first, below-purchase-price bank valuations, although still rare, are happening. Second, pre-approvals are a lower priority for banks than the post-purchase sign-off. Consequently, the pre-approval regime is not always well resourced by banks and can be less thorough than the now tightened up post-purchase approval process. Finally, banks’ credit policies are so volatile that brokers observe lending criteria changes in the interval between pre-approval and purchase – effectively a moving of the goalposts. Together these factors heighten the likelihood of a shock rejection.
I have some sympathy for the banks living with tighter prudential rules. But there is more they can do to help borrowers, brokers and themselves. They should be cautious about the infallibility of valuations that come in lower than an auction sale price. Sworn valuations are largely based on recent comparable sales, and hence in a market recovery are often going to lag current prices.
Banks need to give brokers and their customers more certainty that a pre-approval won’t be reversed. It may mean making the pre-approval process more robust with greater due diligence about the borrower undertaken upfront.
Finally, banks should communicate better with the public about the level of comfort they have with pre-approved customers bidding. My take is that some brokers and borrowers are being overly cautious in ruling out auctions, but their behaviour is understandable given the lack of clarity from banks.
It is a perverse outcome for all concerned – including the banks – if buyers shun auctions. With the best assets generally sold at auctions in an inherently transparent manner, banks would be increasing not reducing their risks by pushing buyers towards private sales. R Wakelin