Getting Pre-Approved: Your First Step

Getting pre-approved for an investment loan should be your first step before looking at properties. Pre-approval tells you exactly how much you can borrow, gives you confidence when making offers, and often reveals issues you need to address before applying. This guide will walk you through the entire pre-approval process for Australian investment property loans.

What Is Pre-Approval?

Pre-approval (also called conditional approval) is when a lender formally assesses your financial situation and confirms how much they're willing to lend you for an investment property purchase. It's not a guarantee - final approval depends on the specific property you choose - but it gives you a realistic borrowing limit.

Investment Loans vs Home Loans: Key Differences

Investment property loans have different criteria and requirements compared to owner-occupier home loans:

Stricter Lending Criteria

• Higher deposit required: Usually minimum 20% vs 5-10% for homes
• Lower loan-to-value ratios: Most lenders cap at 80% LVR for investment
• Stricter income requirements: Must prove ability to service without rental income
• Higher interest rates: Investment rates typically 0.3-0.7% higher than owner-occupier

Different Assessment Methods

• Rental income: Only 75-80% of rental income is counted towards serviceability
• Stress testing: Assessed at higher interest rates (usually +3%)
• Multiple properties: Each additional property reduces borrowing capacity
• Tax implications: Negative gearing benefits are generally ignored

What Lenders Look For

Investment property lenders assess your application based on several key criteria:

Income and Employment

• Stable employment: Minimum 6-12 months in current role
• Adequate income: Must service all debts without relying on rental income
• Employment type: Permanent employees get best rates; self-employed face stricter criteria
• Income documentation: Recent payslips, tax returns, employment contracts

Financial Position

• Deposit amount: 20% minimum, plus costs (stamp duty, legal fees)
• Savings history: Genuine savings over 3-6 months preferred
• Existing debts: Credit cards, personal loans, other mortgages all reduce capacity
• Living expenses: Realistic assessment of your monthly spending

Credit History

• Credit score: Higher scores get better rates and terms
• Payment history: No missed payments on existing debts
• Credit enquiries: Too many recent applications can be negative
• Defaults or bankruptcies: May prevent approval or require specialist lenders

Required Documentation

Investment loan applications require extensive documentation. Gather these before applying:

Identity and Employment

• Driver's licence or passport
• Recent payslips (usually last 2-3)
• Employment contract or letter
• Tax returns (last 2 years)
• Notice of Assessment from ATO

Financial Documents

• Bank statements (3-6 months for all accounts)
• Credit card statements (3 months)
• Existing loan statements
• Investment property income statements (if applicable)
• Asset valuations (shares, super, other properties)

Self-Employed Additional Requirements

• Business financial statements (2 years)
• Business Activity Statements (BAS)
• Accountant's letter or declaration
• ABN registration
• Business bank statements

How Much Can You Borrow?

Your borrowing capacity for investment property depends on several factors:

Debt Service Coverage Ratio

Lenders calculate whether your income can cover all debt repayments, including the new investment loan, without considering rental income. A common requirement is that your income must be at least 120% of all debt repayments.

Factors That Reduce Borrowing Capacity

• High living expenses: Lenders use either declared or benchmark figures
• Credit card limits: Assessed as if fully drawn, even if not used
• Other investment properties: Each reduces capacity for additional borrowing
• Dependents: Children increase assessed living expenses

How to Improve Your Borrowing Capacity

If your initial assessment shows insufficient borrowing capacity, try these strategies:

Reduce Existing Debts

• Pay off credit cards and personal loans
• Cancel unused credit cards (limits still count against you)
• Reduce credit card limits on cards you keep
• Consider debt consolidation at lower rates

Increase Your Income

• Ask for a pay rise or promotion
• Take on additional work or overtime
• Include partner's income if applying jointly
• Document all income sources (bonuses, commissions)

Improve Your Credit Score

• Pay all bills on time for at least 6 months before applying
• Don't apply for credit in the months before your loan application
• Check your credit report for errors and dispute them
• Keep old credit accounts open to maintain credit history length

Optimise Your Application

• Choose the right lender for your situation
• Consider using a mortgage broker
• Time your application when your finances look strongest
• Be conservative with expense estimates

Different Lender Types and Their Criteria

Not all lenders have the same requirements. Understanding different lender types can help you choose the right one:

Big Four Banks (CBA, ANZ, Westpac, NAB)

• Pros: Competitive rates, extensive branches, comprehensive products
• Cons: Strict criteria, slow processing, less flexibility
• Best for: Strong applications with clean credit and stable employment

Regional Banks (Bendigo, Bank of Queensland, etc.)

• Pros: More personal service, competitive rates, reasonable criteria
• Cons: Limited branch network, fewer product options
• Best for: Good applications that want personalised service

Non-Bank Lenders (Pepper, Liberty, etc.)

• Pros: Flexible criteria, faster processing, specialist products
• Cons: Higher rates, limited features, online-focused
• Best for: Self-employed, complex income, or bruised credit

Working with Mortgage Brokers

Mortgage brokers can be valuable allies in the pre-approval process:

Benefits of Using a Broker

• Lender knowledge: Know which lenders suit different applicant types
• Application management: Handle paperwork and follow up with lenders
• Rate negotiation: May access better rates than going direct
• Ongoing service: Help with refinancing and future applications

Choosing the Right Broker

• Look for investment property experience
• Check their lender panel includes variety of options
• Understand their fee structure (most are paid by lenders)
• Get referrals from other investors or professionals

The Pre-Approval Process Step-by-Step

Here's what to expect during the pre-approval process:

1. Initial Assessment (1-2 days)

• Complete loan application form
• Provide initial documentation
• Credit check is performed
• Basic serviceability calculation

2. Document Verification (3-7 days)

• Lender reviews all submitted documents
• May request additional information
• Employment verification (sometimes)
• Income and expense verification

3. Credit Assessment (5-10 days)

• Detailed credit policy assessment
• Final serviceability calculation
• Risk assessment and pricing
• Credit committee approval (if required)

4. Pre-Approval Issued (1-2 days)

• Formal pre-approval letter issued
• Valid for 3-6 months typically
• May include rate lock option
• Subject to suitable security property

After Pre-Approval: What's Next?

Once you have pre-approval, you're ready to start property shopping:

Property Shopping Guidelines

• Stay within your pre-approved amount (including purchase costs)
• Consider the lender's property criteria (location, type, condition)
• Factor in rental income potential when evaluating properties
• Keep your financial situation stable until settlement

From Pre-Approval to Formal Approval

• Property valuation: Lender orders independent valuation
• Property review: Ensures property meets lending criteria
• Financial update: Recent payslips and bank statements
• Final approval: Usually within 5-10 days of property contract

Common Pre-Approval Mistakes to Avoid

• Applying with the wrong lender: Research criteria before applying
• Incomplete documentation: Missing documents delay the process
• Unrealistic income claims: Overstatement will be discovered and hurt your application
• Too many applications: Multiple enquiries damage your credit score
• Ignoring property criteria: Not all properties are acceptable to all lenders
• Letting pre-approval expire: Monitor validity dates and renew if needed

When Pre-Approval Might Be Declined

Understanding common decline reasons can help you prepare a stronger application:

• Insufficient income: Can't service the loan at stress-test rates
• Too much debt: Existing commitments reduce borrowing capacity
• Poor credit history: Defaults, late payments, or too many enquiries
• Unstable employment: Recent job changes or casual employment
• Inadequate deposit: Not enough genuine savings or deposit source unclear
• Self-employment issues: Insufficient documentation or declining income

If declined, ask for specific feedback and work on addressing the issues before reapplying.