What is a Mortgage Pre-Approval?
Pre-approvals are becoming more and more desirable for many prospective homebuyers across Canada.
Simply put, a Mortgage Pre-Approval indicates that a Lender has assessed your financial situation and has subsequently qualified you for an amount of money to borrow for the purchase of a home.
It’s a win-win situation for the Borrower and the Lender to have everything on the table. It ensures that both parties can focus their efforts on searching for homes that fall within the realistic budget of the homebuyer.
Most importantly, when a homebuyer gets a Mortgage Pre-Approval, they protect themselves from rising interest rates by locking down an interest rate on a future Mortgage – all for up to 130 days.
If interest rates were to fall during the Pre-Approval period, the home buyer would still have the option to shop around wherever they please for a Mortgage – so they really can’t lose by getting a Pre-Approval.
What’s happening in the Canadian housing market?
The pandemic has seen the housing market rise and fall and competition has been at an all-time high. This has made house hunting require a significant amount of time investment for many people.
While obtaining a Mortgage Pre-Approval doesn’t necessarily guarantee you an official approval on a home – when the time comes to put in an offer, it certainly improves the likelihood that it will.
With the increasing levels of competition in real estate and rising 5-year Fixed Mortgage Rates, it’s a strategic move to obtain a Mortgage Pre-Approval so that you can stand-out among the competition. This way, you can focus your search on homes in your financial range, all while being aware of your borrowing value and protecting yourself against rising interest rates.
3 Benefits to Getting a Mortgage Pre-Approval
1. Protection From Rising Interest Rates
While Fixed Mortgage Rates used to sit around 2%, they have risen at most banks to approximately 3.19% (less than 20% down payment) and approximately 3.89% (20% or more down payment).
Variable Mortgage Rates have been more unpredictable during the pandemic.
A Variable Mortgage Rate is expressed as a discount to the prime rate of the Lender.
So, the value for a homebuyer comes from the discount that a Lender is currently able to offer at that given time for a Variable-Rate Mortgage. During the pandemic, the discount rate has fluctuated significantly for Lenders across Canada.
When you get a Mortgage Pre-Approval, you lock in on a rate that protects yourself from market fluctuations that could happen during your Pre-Approval period for Fixed and Variable-Rate Mortgages.
2. You Can Get Ahead of the Competition
In a hot real estate market, having a Mortgage Pre-Approval will give you the power to make an offer on a house quicker than the competition, who may have note received a Pre-Approval.
It’s still advantageous for you to get a Pre-Approval when the competition’s also obtained one because it levels the playing field for you.
Not only do you position yourself strategically in the market when you get a Pre-Approval, but you also become a more attractive prospect for the Seller.
When the time comes to make an offer to a Seller, it increases the likelihood that your offer is accepted when you know your borrowing value.
3. You Know Your Borrowing Value
Knowing your borrowing value allows you to focus your search for homes that are realistically within your budget.
This is extremely important in competitive real estate markets because it can take a significant amount of time to lock down a new home. So, investing your time in searching for homes that are below or above your budget can be counterproductive.
When your broker knows your budget, the home features that you desire and your borrowing value – they can help you focus your search on homes that meet your vision and fit within your budget.
If your dream home is out of your budget, then knowing your borrowing value in the real estate market could help you gauge short-term home ventures that would be ideal for renovations. This way, you can put it back on the market in the coming years and upgrade to a house that’s more desirable.
Comparing your borrowing value to the prices of homes will give you a better understanding of the going market value, helping you to lock down an offer when the time comes.
A Pre-Approval is in the best interest of both the Buyer and the Lender because it enables them to get on the same page when hunting for homes. When obtaining a Pre-Approval, they’ll know what the budget allows for in the current market.
Knowing your borrowing value and having a Pre-Approval will help the home buyer in competitive markets when they need to make a firm offer quickly to get ahead of the competition.
Lastly, a Pre-Approval protects the home buyer from rising interest rates that could occur during the Pre-Approval period.
So if you’re in the market, it could be well worth it to get yourself a Pre-Approval before you start hunting for homes. With markets that are more competitive than ever, this is a great way to set yourself apart from the rest of the pack so you can get into that new home with as little stress as possible.