Pre-Approval Isn't a Guarantee: What Sydney Buyers Need to Know in a Falling Market

Sydney has turned, and that changes what a pre-approval is really worth

If you've been pre-approved and you're out looking, you'd be forgiven for thinking the hard part is done. The bank has run your numbers, given you a figure, and told you to go shopping. It feels like a green light.

It isn't quite. A pre-approval is a lender's view of you - your income, your debts, your deposit. It is not a view of the property you haven't bought yet. In a rising market that distinction rarely bites, because the valuation almost always stacks up. In a falling one it bites regularly, and right now Sydney is falling.

Cotality's Home Value Index has Sydney dwelling values down around 1.2% in June, roughly 3.2% over the June quarter, and sitting about 3.7% below their peak. The Sydney median dwelling value is somewhere around $1.27 million. Meanwhile the RBA held the cash rate at 4.35% in June after three rises earlier this year, with the next decision due on 11 August.

I spent eight years in lending, including time at CBA, before becoming a broker. The gap between "pre-approved" and "actually funded" is the thing I spend the most time explaining, and it's the thing that catches good buyers out. So here's the plain version.

What a pre-approval actually is

Most pre-approvals in Australia are conditional approvals. The lender has looked at your income, expenses, credit file and deposit, and formed a view on what it would likely lend you. That's genuinely useful - it tells you your budget, it makes agents take you seriously, and it surfaces problems while you can still fix them.

What it does not do is commit the bank to funding a specific purchase. Full or unconditional approval only comes after the lender has seen the contract, valued the property, verified your documents afresh and cleared its conditions. That step usually takes a few business days once the valuation is back.

There are also different grades of pre-approval, and the difference matters:

• System-generated pre-approval. Fast, often close to instant, produced by a computer with little or no document checking. It's barely more than a calculator with a letterhead.
• Fully assessed pre-approval. A credit assessor has actually read your payslips, statements and credit file and signed off. This is the one worth having, and the one worth waiting the extra few days for.

If you might bid at auction, know which one you're holding. At an auction there's no cooling-off period and no finance clause - the contract binds on the fall of the hammer. A thin pre-approval is a very uncomfortable thing to be standing on in that moment.

The part that's changed: the valuation

Here's the mechanic that trips people up. A lender lends against the lower of the purchase price or its own valuation. Not the price you agreed. The lower of the two.

Valuers work off comparable sales from the preceding few months. When the market is rising, that backward-looking method quietly works in your favour and valuations stack up. When it's falling, it works against you - and valuers turn more conservative on top of it.

So a risk that was largely theoretical eighteen months ago is live today: you pay $1,200,000, the valuer says $1,150,000, and the bank calculates your loan off $1,150,000. Your deposit hasn't changed, but the shortfall lands entirely on you.

A worked example, roughly. Say you're buying at $1,200,000 with a 20% deposit of $240,000 and a $960,000 loan - a tidy 80% LVR. The valuation comes back at $1,150,000. The bank will now lend 80% of $1,150,000, which is $920,000. You need to find another $40,000 in cash, or accept a higher LVR and pay lenders mortgage insurance you hadn't budgeted for.

What to do if a valuation comes in low

It's not automatically fatal. In rough order of what I'd try:

• Challenge it, with evidence. Valuations can be reviewed. If the valuer missed a recent comparable sale, a renovation, or a feature of the property, that's a legitimate basis to ask for a reconsideration. Vague disagreement is not - you need actual sales evidence.
• Try a different lender. Lenders use different valuation panels and different methods, and a second lender genuinely can return a different number on the same property. This is one of the clearest arguments for having access to more than 70 lenders rather than one bank's single opinion.
• Renegotiate. In a softening market a low valuation is real evidence, and vendors are more open to it than they were a year ago. It's an awkward conversation, but it is a conversation.
• Cover the gap. More deposit, a family guarantee, or wearing the LMI. Sometimes the right answer - as long as it's a decision rather than a scramble.
• Use your finance clause. On a private treaty purchase, if finance genuinely can't be arranged on the terms in the contract, the clause exists for exactly this. Talk to your solicitor early, not on the last day - these clauses run on short timeframes.

The theme running through all of that is time. Every one of those options needs days you won't have if the valuation is ordered late. Get the contract to your broker the moment you sign.

Pre-approvals expire, and that matters more in this market

Most pre-approvals last three to six months, depending on the lender. When one lapses you generally re-apply with fresh payslips and statements, and your file is assessed against today's policy and today's assessment rate.

That's the sting. Serviceability settings have tightened this year - three rate rises, the 3 percentage point assessment buffer sitting on top of your actual rate, and APRA's new limit on high debt-to-income lending. A pre-approval issued in January was assessed under different conditions than one issued today. Renewing isn't always a formality, and the number sometimes comes back smaller.

If your pre-approval is more than a couple of months old and you haven't bought, treat the figure as indicative rather than banked - and tell your broker before you bid, not after.

Don't collect pre-approvals like business cards

This one costs people real money. Every formal application is a hard enquiry on your credit file. Each one can knock roughly 5 to 20 points off an Equifax score, they stay on your file for five years, and a cluster of them in a short window is a genuine red flag to assessors - some lenders get twitchy at more than one or two in six months.

From the assessor's chair, five enquiries in three months doesn't read as "careful shopper". It reads as "declined four times".

The fix is straightforward: do the comparison work before anything is lodged. Policy, income treatment and valuation appetite can all be checked without touching your credit file. Then apply once, to the right lender.

How I'd approach it right now

• Get fully assessed, not system-generated. Especially if there's any chance you'll bid at auction.
• Know your valuation buffer. If you're stretched at 90 or 95% LVR, a soft valuation has nowhere to go. Build in room, or know in advance where the extra funds would come from.
• Get the contract reviewed early. By your solicitor and by me. The valuation is the long pole - order it the day you sign.
• Refresh your numbers before you bid. Not before you start looking. Before you bid.
• Keep your file boring. No new car loans, no new credit cards, no new buy-now-pay-later accounts between pre-approval and settlement. Lenders re-check, and a new liability at the wrong moment can undo an approval.

The honest read

A cooling market isn't bad news for buyers - in a lot of ways these are the best conditions we've had in a while. There's more stock, less heat in the room, and vendors who will actually negotiate. Values down roughly 3% over a quarter means the same property costs less than it did in March.

But the finance side has to be tighter than it needed to be in 2021, because the valuation is no longer a formality and the assessment settings are less forgiving. The buyers who do well from here are the ones who go in with a properly assessed approval, a realistic buffer, and someone watching the contract dates.

If you'd like your pre-approval looked over - or you're not sure whether the one you're holding would survive a valuation - I'm always happy to have a free, no-obligation chat. With access to more than 70 lenders, I can tell you which ones read your situation most favourably and which are landing sensible valuations at the moment.

This is general information only and not personal financial advice - everyone's situation is different, so please get in touch and we'll look at yours together. Property values, interest rates and lender policy all change, so treat the figures here as a snapshot in time. For contract and cooling-off questions please speak to your solicitor or conveyancer, and for any tax questions your accountant or a licensed adviser.

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