THE problem with the property market is simple, according to the executive chairman of Aussie, John Symond.

“Pent-up demand to 'cash in' on the boosted housing grant has resulted in queues of first-home buyers lining up to inspect properties to be bought," he says.

"This created a false sense of urgency. Without a written loan preapproval, some agents won't even let them in the door to inspect a property.

“First buyers have had no negotiating power and in Sydney, Melbourne and Brisbane, in particular, some people are paying up to $50,000 too much on a $400,000-$500,000 property just to get the $14,000-$21,000 boost.”

It doesn't help that we're not building enough homes to meet the demand – a shortfall estimated by the Housing Industry Association at 56,600 homes in 2009.

RateCity reports that between June and August, the number of home-loan applications received was 10 times the amount for the same period in 2008.

We are now entering the busiest time of the year for home loans, so if you are one of those vying for credit, you need to know the new situation you are dealing with.

KNOW THE RULES

“[Lenders] are rejecting the kind of loans that, eight months ago, would have been OK,” says a franchisee of broker Refund Home Loans, Anh Cheng. “Lending criteria have tightened quite a lot. For example, LVRs [loan to valuation ratios] were 100-106 per cent and now most of our lenders have a 90 per cent maximum.

The borrower must also establish 5 per cent genuine savings over three to six months, depending on the lender. If the borrower is relying upon a share portfolio, they should be able to provide six months' evidence of their holdings.” Other mortgage brokers echo this experience.

The chief executive of RateCity, Damian Smith, notes that last year the company found 653 loan products offering a 100 per cent LVR. “Our database [now] shows only three,” he says.

The executive director of Loan Market Group, John Kolenda, says: “Lenders will assess your overall [debt] position, including the number of credit cards, car loans and other borrowings.

It's important to understand that what is relevant is not only how much you owe ... but the credit limits, as well as how much you could borrow.” Standards are hardening for income too, notes Cheng.

“In the recent past it was common for lenders to want to know that a borrower could service [that is, make the repayments for] an increase in interest rates of 1.5 per cent above the variable rate, which would be around 6.5 per cent to 7 per cent on today's rates.

It was a kind of benchmark. Now some lenders set a standard 8 per cent.” You can't even take mortgage insurance for granted, Kolenda says. “Although the level at which it is required remains anything over 80 per cent of valuation, there are slight variations between the insurers according to the postcode of your property and its size.”

Cheng says: “In the past I could have predicted the outcome of an application for mortgage insurance. Now this is not so. I have seen borrowers rejected for the insurance, even after the lender has accepted them.

For example, one borrower missed out on insurance when she moved her job to a new city, even though she was staying with the same employer.” And there are no signs that tightened lending tests will ease soon.

What does Aussie John think about all this? “In many areas it is well justified,” Symond says. “I've always been concerned about young people – especially first-home buyers – who haven't saved their deposit and borrow close to 100 per cent of the price.

This is an accident waiting to happen.” The message is clear: do your sums and be conservative in borrowing. And see the hot tips (right) to give yourself the best chance of getting approved.

HOT TIPS FOR SUCCESSFUL BORROWING

Prepare your loan application thoroughly. “If you make a loan application to three lenders, all around the same time and for the same amount, and your applications are declined, these three events will show up on your credit record and raise questions with any subsequent lender you approach,” John Kolenda warns. Borrow prudently.

As John Symond says: “I believe we will see interest rate rises of 2-2.5 percentage points over the next 18 to 24 months. The greatest risk for first-home buyers is over-borrowing.” Compare apples with apples.

“Always look at the comparison rate (AAPR) of home loans to give you a better indication of how much it will cost. Comparison rates generally include any ongoing fees and upfront costs and average out the interest rate over the life of the loan,” Damian Smith says.

Get a savings boost. “Some lenders will accept a 'gift' showing up in your savings history, such as a sum of money from family,” Kolenda says. Ask. Know what counts. The first-home buyer grant and boost are not treated as "genuine savings", though they can contribute to the purchase price, Anh Cheng says. Control your credit. Kolenda says: “You might have to get rid of one or two credit cards or loans to make your mortgage application more attractive.”

“A broker can do in an hour what might take the consumer weeks to research. They can also recommend lenders which the average borrower has never heard of,” Symond says.

For those looking at getting a loan down the track, Cheng recommends you start saving today. And prepare the evidence, such as bank statements. CASE STUDY “We both had good incomes and good jobs but our loan application was caught by changes as the economy went deeper into the global financial crisis.” So says Benjamin Wormleaton, an IT recruitment consultant who, with partner Alison Oldenburg, a design engineer for a medical device company, bought their first home in July, in Sydney's inner west.

“The goalposts moved slightly and this affected the style of mortgage we needed to apply for," Benjamin says. “When we first applied for the mortgage, the lending institutions were more lenient in terms of the structure and style of loan we could obtain but as time went on their guidelines became tougher and we were required to provide a larger sum up front before the bank would grant us our loan.

“This was our first home and our first time getting a mortgage. Our broker did a fantastic job, breaking it down in a way we could understand and guiding us through a process we found daunting. “We started looking six to eight months before we purchased. It seemed there wasn't too much competition and we thought conditions would remain the same but as time went on there seemed to be more and more competition and things became extremely tough.

"We realised we could not waste time putting in a bid that was not up to scratch and if we were serious about a property we liked, we needed to make a fast decision with a strong offer.”

WHAT WILL HAPPEN TO PROPERTY WHEN THE BOOST ENDS?

“The ones that need the boost are really on the hunt now. Those with genuine savings are saying: 'Look, Anh, I'm waiting until all this is over.' Property is overpriced and many are selling for $30,000 above their valuations. [As a result, lenders] are rejecting the kind of loans that, eight months ago, would have been OK.” Anh Cheng, a franchisee of broker Refund Home Loans, who reports lenders have started requiring higher deposits and evidence of a significant and genuine savings history.

“Contrary to what some commentators have been saying, first-home buyers are already slowing in number, having peaked around April. As we get closer to the end of the boost, people realise it will take a month or two to find a property and settle. It will be a gradual deflation rather than a popping of the balloon.” Dr Adir Shiffman, of HelpMeChoose .com.au, who believes what happens after December 31 will not relate to the boost but to jobs, interest rates and macroeconomic factors. “I'm predicting a slight softening of house prices up to half a million dollars after December 31 when the boost finishes. This will place much less demand on properties, so first-home buyers are not missing out by waiting as the loss of the boost should be more than compensated by a softening in house prices.”

Aussie John Symond says the slowdown at the first-home buyer end of the market has already started, while low rates and high yields have seen investors start to creep back in.