So, after months of trawling through real estate sites and countless Saturdays spent at inspections, you've finally found your dream home and signed the contract.
In the best case scenario, everything goes according to plan and before you know it, you've got the keys to your new place. But landmines can crop up during your settlement period, which may delay or even stop you from being able to take possession of the home.
Potential issues can include damage to the property discovered at the pre-settlement inspection, tenants not vacating the property in time, and disputes over inclusions.
One of the major concerns as a potential buyer, however, is having issues with your finance. Here are our tips for avoiding and resolving problems with your lender.
When you apply for a mortgage, the lender uses the settlement period – the time between when you exchange contracts and take possession of a home – to assess your finances and consider whether you can make the repayments. This is still the case even if you have pre-approval from your home loan provider; you'll still need to apply for the actual mortgage.
The lender will also consider how much you've paid for the property versus what they think is its approximate market value.
What can delay settlement?
Your finance can be delayed if you don't answer your lender's questions straight away, forget to include the documents they've requested, or provide incorrect information. But even if your documentation is in order, delays can occur as a result of problems on the bank or lender's end.
Issues may include:
- a higher than usual number of applications
- your application being lost or misfiled
- a staff member taking unscheduled leave and not properly handing over your file to someone else.
If you can't secure the loan by your settlement date, you'll likely be charged interest and penalty fees, and the seller may even be able to cancel the sale and keep your deposit. So what can you do to prevent this?
Choose your lender wisely
Choosing a lender can seem like a no-brainer: the cheaper the better, right? But different lenders also focus on different types of customers.
Lenders with the cheapest interest rates may be dealing mainly with people who are refinancing and whose applications are likely not as urgent as someone who's just bought a home and needs to meet a specific settlement date.
Preparation is key to making sure your settlement process runs smoothly.
Standard settlement periods in some Australian states are 30–90 days, and contracts can include painful penalty clauses for buyers who delay settlement, such as fees for late settlement or the ability for the vendor to cancel the sale and keep your deposit. So it's important to know what steps are required during the loan application process.
Have conversations with your bank or mortgage broker early on about what steps are required, what documents need to be provided, and what timeframes are involvedEvelyn Halls, Australian Financial Complaints Authority
"Talking to the bank in advance [of applying for the loan] as much as possible and sorting everything out is the way to go," says Evelyn Halls from the Australian Financial Complaints Authority (AFCA), the external dispute resolution body that handles complaints about lenders and mortgage brokers.
"Definitely there's an expectation that your loan application should be processed within a reasonable period of time, but what is reasonable will vary depending on circumstances: the type of loan, the amount, the type of property that has been purchased … and various other factors, such as whether you're refinancing or applying for a new loan," Halls says.
"It's advisable to have conversations with your bank or mortgage broker early on about what steps are required, what documents need to be provided, and what timeframes are involved, so everything is clear at the outset and everyone has clarity around the process.
"That initial planning is going to pay off down the track."
Talk to the bank about what documents will be needed ahead of time.
Consider applying for pre-approval
Loan pre-approval, also sometimes called approval-in-principle or conditional approval, is a process in which a would-be home buyer applies for an in-principle loan from a lender, and receives approval for a maximum amount.
To get pre-approval, your lender will look at any existing debts you might have (such as other loans or credit cards), your assets, how much you earn, and your expenses.
Pre-approval isn't a guarantee from the bank about how much you can borrow, or even whether you'll get a loan
Getting pre-approval isn't mandatory, but it can be useful in giving you more certainty about how much you'll be allowed to borrow. It also means you'll get more of your paperwork in order earlier in the process.
But beware, pre-approval isn't a guarantee from the bank about how much you can borrow, or even whether you'll get a loan. Factors such as changes to your circumstances or government regulations, as well as the lender's valuation of the property you eventually buy, could affect the outcome of your formal loan application.
Also, avoid applying for pre-approval too early. Pre-approval is generally time-limited, so depending on how long it takes you to find your home, you may need to reapply. But because any applications for pre-approval will appear on your credit file as a loan enquiry, having several in quick succession and with various lenders could affect your borrowing ability, as it could appear as though you're financially insecure.
What about using a mortgage broker?
You may consider using a mortgage broker to act on your behalf, as they'll have the contacts to escalate any issues.
However, we've heard of cases where the mortgage broker has actually been the cause of delays due to badly filled out paperwork or not keeping on top of deadlines. We've also reported on some of the problems within the broking industry, such as brokers pushing borrowers into loans that are bigger and riskier than they can afford.
Throughout the entire process of securing a home loan, brokers are legally required to act in your best interestsPatrick Veyret, CHOICE policy advisor
A law subjecting brokers to a best-interest duty will come into effect on 1 July 2020. This should address some of the issues we've called out, such as putting consumers' interests ahead of their own (previously, brokers were only required to offer a loan that was "not unsuitable").
"The new best-interests duty will be a game changer for the industry," says Patrick Veyret, policy adviser at CHOICE. "Now, throughout the entire process of securing a home loan, brokers are legally required to act in your best interests. The industry is on notice to clean up its act and recommend to people high-quality loans, free from conflicts."
If you still want to use an intermediary, read our guide to finding a good mortgage broker.
- Before applying for the loan, prepare a spreadsheet of your monthly living expenses.
- Consider applying for pre-approval, which can provide more certainty regarding whether the bank or lender is likely to approve your loan.
- Ask lenders for their expected processing time for new applications.
- Beware of shorter-than-standard settlement periods in contracts.
- Apply for the loan as soon as possible after signing the contract of sale (even if you have pre-approval).
- Respond to any questions from your solicitor, conveyancer, broker or lender as soon possible.
- Ask how long each step of the application should take, and follow up if there are delays. If your issue isn't resolved to your satisfaction, ask to speak with the lender's complaints officer. If you're still unsatisfied, contact AFCA.
- As soon as you think you mightn't be able to meet your settlement date, talk to your lawyer or conveyancer. According to Richard Harvey, president of the Law Society of NSW, they may be able to come to an arrangement with the seller's solicitor.
You should act as soon as you suspect things are off-track.
"The first step is always to contact the bank and to try and identify, if you can, what might be the hold-up – whether it's a question of processing time, or if there's any piece of information outstanding," says Halls.
If the lender doesn't provide you with a satisfactory explanation, you can raise a complaint with their internal dispute resolution department, which should be listed on the lender's website.
If that doesn't help, you can lodge a complaint with AFCA, who will consider who was responsible for any unreasonable delay.
If the lender or broker is at fault, AFCA can order they pay you compensation for any damage caused, such as if you needed to defer property settlement and were charged interest or fees. AFCA may also award compensation for non-financial loss, such as any stress and inconvenience you may have suffered.
The day after Nadia* bought a home at auction in NSW, she applied for a home loan with UBank, an online-only subsidiary of NAB, which offered one of the lowest interest rates on the market. She hadn't applied for pre-approval with UBank. Four weeks into her six-week settlement period, she still had no idea whether UBank would grant her finance.
After repeated requests for information, the case manager emailed to say that her credit assessment had been assigned to a staffer who was on leave, and would need to be reassigned to someone else, which could take another seven to 10 days.
The case manager then stopped replying to her emails and phone calls
The case manager then stopped replying to her emails and phone calls, and after spending hours on hold on the general UBank contact line, the call centre staffer said the case couldn't be escalated as the manager of the relevant team had gone home, and refused to give her their direct phone number. It was only when she got in touch with a senior member of UBank's executive team that Nadia's case was escalated and resolved.
So what went wrong? Because of low interest rates and the renewed heat in Australia's property market, UBank said it was experiencing a surge in customer numbers at the time of the application. Plus, a large proportion of its home loan book is made up of refinancers.
Someone who applies for a loan with UBank who has all their documents in order and responds to queries in a timely manner will take roughly seven to eight weeks to go from application to settlement, the bank tells CHOICE. This means that if you've bought a home in a state where standard settlement periods are four to six weeks, you could be staring down the barrel of an expensive delay.
*Not her real name.