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:
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).
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.
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:
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.
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.
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.
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.
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