fbpx

Good news! You’ve completed your application, handed over a mountain of paperwork (just kidding, our system is paperless) and now you’re pre-approved for your mortgage! After a phone call from your mortgage adviser – our favourite phone call to make, by the way! – you will most likely receive a document via email containing the conditions of your pre-approval. Most commonly referred to as a Letter of Offer (or LOO). Here are some of the most important parts of the letter:

Estimated Interest Rates

It’s now a requirement for financial offers to show how much expected payments will be. In an effort to under-promise and over-deliver, most banks choose to show that calculation using the non-discounted floating rate. That is currently around 6% whereas a good discounted 1 year rate is around 4%.

6% can be a little shocking for home-buyers that were expecting 2% less… But don’t worry, it’s not binding. Have a casual look at the regular payments, make sure they’re what you would think they are and move on. Closer to the settlement day, we’ll negotiate some rates (and sometimes a cash contribution).

Priority Amount

At one bank, the Letter of Offer mentions a Section 92 priority amount. It is always more than the mortgage amount, usually around 1.5x and can be another source of surprise for recipients of an offer.

The priority is “the maximum amount the bank has priority over any subsequent mortgage”. As an example, a house worth $700,000 and a mortgage of $500,000 might have a priority of $750,000. This means the bank has access to the first $750,000 resulting from any sale. That makes it very difficult to raise a second mortgage against the property.

While this number seems high, some other banks have an unlimited priority – ie; they receive all funds (that are due to them) in a sale.

Unless your intention is to raise a second mortgage or rack up some serious interest fines, the priority amount shouldn’t be of immediate concern.

Your Letter of Offer is an exciting part of the home-buying purchase.

Conditions

This is the most important section of the Letter of Offer. You should read through all the conditions carefully and begin ticking them off as soon as possible. The conditions can be anything but are usually:

  • a signed Sale and Purchase
    • you may have already provided a copy of the Sale and Purchase Agreement but the bank needs to see the document signed by both Vendor and Purchaser. It must also be dated (this is often forgotten in the excitement of signing!).
  • confirmation of insurance on the property
    • you need to confirm that you are able to insure the property. There are a number of reasons why this may not be possible. Unconsented works or the house located in a high-earthquake zone can both cause problems and delays.

One thing the offer can’t demand is that you take out Life and Health insurance with the same bank that has offered you a mortgage. In other words, a bank can’t withhold a mortgage from you simply because you don’t take their Life and Health insurance. You should absolutely get insurance to protect yourself, it is just important to make sure it is the right policy for you. Talk to an adviser early to get this sorted.

Our book “The Successful First Home Buyer” walks you through each step to present yourself to the bank as the perfect first-home buyer. Available in paperback at The Book Depositary or on Amazon Kindle.

Acceptance

Some Letters of Offers will have an Acceptance at the end. A place to sign to confirm that you want to take the mortgage.

Until you have all the conditions ticked off and have finalised your mortgage structure with your adviser, there is no need to sign this part.

Expiration Date

Most Letters of Offer expire after 2 months and that can go by fast. But don’t worry, they are easy to renew. After 2 months, all that is required is to confirm that there has been no significant change to your financial circumstance (you haven’t lost your job or taken out any new debt). The bank will renew the Letter of Offer for a further 2 months. You can do this 2 times (a total of 6 months) before you need to completely reapply. Luckily, our online system means you simply need to update your details and upload some new documents. Renewal is easy so take your time, find the right place for you and don’t worry about the expiration date.

Letter of Offer – Summary

The Letter of Offer is the beginning of a successful home purchase or refinance. Like all contracts, there is nothing to worry about with them as long as you understand them. The banks aren’t trying to hoodwink you into giving them your first-born. Just read the Letter of Offer slowly and make sure you understand what the next step is. If in doubt, talk to your property professionals.

Latest Posts

OCR announcement - 13/11/19

No reduction of the OCR Despite the diversity of opinions of whether to cut or not to cut the Official Cash Rate to 0.25%, the Reserve Bank unexpectedly held interest…

Read More

The Official Cash Rate (OCR) explained

What is the OCR? The OCR is an interest rate set by the Reserve Bank of New Zealand which defines the wholesale price of borrowed money. This directly affects the…

Read More

Deposits: How much do you need for your first home?

If you have less than 20% deposit, you are referred to (by the banks) as a Low Equity (or Deposit) Borrower.  You are required to meet a different set of…

Read More

First Home Grants and KiwiSaver

First home buyers can often get tangled up in the pile of new concepts to learn.  In this article, we explore the basics of withdrawing your KiwiSaver and meeting the…

Read More

Read previous post:
Mortgage Deposit: Can I take out a loan to increase my deposit?
Mortgage Deposit: Can I take out a loan to increase my deposit?

As you may know from our other blogs, there are some key levels of deposit that you need to get...

Close