There are 3:- Pre-approvals, Construction, Off the Plan purchases:-
Pre-approvals:- You have done the right thing & gone to your Broker or the Bank & obtained a preapproval. With this your hand you are out there looking for that right property (hopefully as market demand falls with less people).
The problem with this is twofold.
Firstly, as rates increase many lenders are reviewing their credit policies with a view to tightening them. This means that an application that was approved (say) 6 weeks ago may not still be approved with greater scrutiny on living expenses, total debts to income, or sources of income.
Secondly, When your loan was pre-approved all lenders are required to apply what is known as a sensitivity factor to your total borrowings. This could mean applying an interest rate of (say) 3% above your approved rate. This is a form of stress testing/ or allowing for possible interest rate rises.
As rates increase the sensitised rates increase. This means that lenders are applying a higher stress test to your position than they were (say) 6 weeks ago. It follows that a pre-approval granted then may not be approved now.
Construction:- Most people are aware of the rising failures of building companies due to the lack of materials and labour, high demand & fixed priced contracts that are committed to so far in advance of actual construction. While demand is expected to slow and this may ease pressures we can expect valuations to come under pressure as the market slows. The Big 4 banks each have a view on how Brisbane for example will fare over the calendar years of 2022 and 2023. CBA suggest a 4% drop, ANZ 7%, Westpac 0%, NAB 8.8%.
Off the Plan:- This is a form of property speculation. There are a number of risks associated with OTP purchases. These include:- Will it be completed on time, will you get what you pay for, will the developer/ builder go broke, will the building have defects, will the specifications in reality match what was offered, will incentives including rental guarantees offered inflate value. While all of these are valid, for our purposes we concern ourselves with our speciality = the funding!
You might have a preapproval to purchase however the fine print of this must be understood. The property will have to be valued on completion. Often this is only weeks before proposed settlement. While people may speculate that the property will go up in value from the date they sign the contract, the reality can be the opposite. In 2019 the ABC studied this & found that 43% of Units at Settlement in Brisbane were worth less that what they were purchased for. That's 4 out of 10!
If your purchase price is (say) $800,000 and the valuation comes in at (say) $700,000, the lender will revise any approval. If your loan was limited to (say) 90% of the purchase price = loan of $720,000 after valuation this now becomes a loan of $630,000. You are effectively short $90,000. If you can't settle as a result you stand to lose your 10% deposit plus the developer could sue you for the difference between the original contract you signed and the eventual sale to next buyer.
OTP purchases can be very good. In times of likely property value decreases - their risk goes up.