Everything you need to know about a mortgage pre-approval

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On April 13, 2022, the Bank of Canada announced its second interest rate hike of the year – with its benchmark interest rate now sitting at one per cent. As a homebuyer in today’s market, things may feel uneasy, as there are many uncertainties that come with the process. From saving for a down payment and finding the right home, to navigating increasing interest rates and qualifying for a mortgage, there’s a lot you need to consider. If you are thinking about buying a home right now, you can balance out some of this uncertainty with a mortgage pre-approval. It’s a great way to be prepared for the process so you can put your best foot forward in what feels like an unpredictable market scenario. Further, with rates going up, you can lock one in for up to 120 days.

Why a mortgage pre-approval is a good idea

A pre-approval conditionally approves your eligibility for a mortgage. While it’s less formal than getting a final approval, in this situation, your lender will commit to holding a mortgage rate and product for you for a 120-day period. Given the unpredictability of interest rate hikes, a pre-approval is a fundamental tool buyers can use to get some of their power back in this situation.

For example, 120 days from now brings us into the second week of August. In the event that you get pre-approved now, you could potentially lock in a lower interest rate and hold it through the hot spring and summer market without being subject to further rate increases. If there happened to be a rate hike in June, you would not be affected.

If you buy a home within that 120-day period, this pre-approval can convert to a final mortgage approval, pending that specific conditions are met. A mortgage pre-approval is usually free and comes with no obligation to move forward. At Homewise, we’ve made the mortgage pre-approval process incredibly simple with an online application that you can complete in just five minutes.

It is important to note, pre-approvals are not 100 per cent, but they are a good guide.

It sets the record straight on what you can afford

With inflation rising and gas prices hitting record highs, many Canadians have an eagle eye on their monthly household spending. When you add buying a home into the mix, it makes understanding your affordability that much more essential to your financial well-being.

When you get pre-approved for a mortgage, it provides insight into what you’re eligible to borrow and how much you can afford to spend. This can help you set clear parameters on spending and what neighbourhoods you’re able to buy in, making for a more productive home search. A pre-approval can also help you proactively budget what your monthly payments will be, along with any other expenses that are often missed, such as closing and carrying costs. Getting pre-approved encourages you to take these extra costs into account well in advance.

It boosts your credibility as a buyer

In today’s ultra-competitive market, a pre-approval gives you added negotiating power, demonstrates your financial stability and confirms that you’re trustworthy and serious about making a purchase.

A pre-approval doesn’t guarantee final approval

A pre-approval is conditional so that in no way means you’ve received a final mortgage approval. During the 120-period of conditional approval, your lender can revisit and review your application at any time – and revoke your pre-approval if certain conditions are not met. That’s why it’s recommended that you avoid racking up your credit card with big purchases, applying for new credit, switching or quitting your job and/or co-signing a loan during this time. All of these things can potentially affect your credit score and debt-to-income ratio, both of which are two critical factors that lenders consider when reviewing your mortgage application.

Don’t forget to shop around different lenders

Many first-time home buyers will often run straight to their bank or their parent’s bank for a mortgage, without considering other (more favourable) options. Believe it or not, there are other lenders besides banks that you can use like credit unions and monoline lenders who offer strong mortgage products – which may even work better for you in the long run. For example, most first-time buyers tend to break their mortgage before the end of their five-year term and some lenders will charge large penalties for this. That’s why it’s important to shop around different lenders and get clear on the various products and features available before you lock anything in.

Purchasing a home is a significant milestone that marks the start of a new chapter in your life. One sure way to make this process as enjoyable and stress-free as possible is by getting pre-approved for a mortgage.