Short-term Canadian Mortgage rate volatility: what's up?

Updated: October 14, 2009

WOW.

Our team has received another notice this morning that we're on the cusp of having rates jack upwards almost .50% by tomorrow morning. One of our lenders did this on Friday and another one did this yesterday afternoon. Simple solution for first-time homebuyers and rate-shoppers : get your preapprovals in NOW and we'll be able to hold your rates for the next 120 days! **Although** many lenders are jumping upwards, we're still able - for a limited time (subject to change without notice) - to submit your file for mortgage preapproval at 3.89% for a 5-year fixed term!

It was just about 3-4 weeks ago that we just saw Canadian mortgage rates in the 4.39% range. We saw a quick adjustment downwards to the 3.84% range and then this sudden bump. What gives? Our team has had more than a few flustered and frustrated conversations with colleagues and clients between yesterday afternoon and this morning as we work through the process of helping with mortgage preapprovals. The aftershock is that it has started a few balls rolling in terms of conversational topics: Why the short-term volatility? Is this a real ramp-up towards higher rate plateaus or is this an artificial blip? Where do we go from here? To answer these questions one-off, as well as more of your own, to query please drop me a line at 1.877.507.9293 and we'll walk through some of the general volatility concepts together!

Let's get through the easiest and most efficient line of questioning here: What is a preapproval, and what good is it anyways?

Simply put, a preapproval is a process wherein we - your Canadian Mortgage Specialists - help understand your mortgage needs, gather your information, number-crunch your maximum available mortgage scenario and then submit it to a lender for review. Generally within 24 hours, we'll have a certificate that will outline some basic and general terms of pre-approval for your home-hunting needs.

The Preapproval document states that the lender is conditionally prepared to lend you money based on the data that we gathered from you and submitted to them.

It is important to highlight the part that the lender is ‘conditionally prepared' to lend you money because they don't know anything about the property yet, nor have they reviewed any of your income, employment or downpayment documentation either. Essentially, all that the lenders see is a digital ‘snapshot' you: your name and personal data, your credit bureau/beacon score and your number-crunching. From there, an underwriter has flashed their eyes across the deal and if it ‘fits in their box', they will issue a preapproval certificate. It will outline the conditions and terms that you requested: maximum potential property value, minimum downpayment required, interest rate, and amortization. It will also include a list of documentation that you will be required to complete the file. Your Mortgage Specialist will be able to coach you through the required documents for your unique file.

Cool.

So… is it guaranteed that a lender will lend you the money if they've preapproved the file for you?

Not at all.

A mortgage preapproval should be your first step in your home-hunting process: based on the information that you provide your Mortgage Specialist, they can compute your unique maximum potential mortgage and property values. This lets both you and your Realtor know a general and realistic ballpark for property values as you go house hunting. In addition, the preapproval will lock in your rate "ceiling" for upside protection if the current market rates are volatile or on the rise. Depending on the lender, we can ensure that you get the best rates held for 90-120 days as you find and negotiate your purchase or refinance transaction.

The main reason that the mortgage preapproval terms are not guaranteed is most easily covered by the blanket statement "anything can happen". Between the time that you receive your mortgage preapproval and its expiry, you could:

- Lose your job, receive a pay cut or change occupations altogether.

- Shift from full-time to part-time, or employee to self-employed

- Lose your deposit. Your deposit, if invested in something volatile, could diminish in value and you may not have as much as you originally banked on

- Lose your cosigner: House-hunting is a very emotional process and friends, family members and spouses can divide through the process. Without your cosigner, it is not very likely that you could still approve for a mortgage of the same value.

- The property that you choose could not meet the lender or insurer guidelines for quality, age, former issues with previous owners (property could be flagged for non-complete status or mould issues, etc...) … and many other factors. While willing to help, but with so many variables and 'loose ends' lending institutions are only willing to cross the bridge so far.

So then… What purpose does a preapproval really serve if it's not guaranteed?

First of all, a Preapproval will lock in today's best rates for up to 120 days. In certain cases - such as you are building a new home and the process can take up to a year to complete - we are able to hold a highly competitive rate for up to one year. Effectively, this builds in a ‘ceiling' rate where you can shop protectied: you've now hedged off the upside risk of rate volatility. If the prevailing market rates shift upwards between your preapproval and closing date, your rate will be the rate on your preapproval. Alternatively, if rates creep downwards, you get the lowest rate available whether it's the prevailing market rate or your preapproval rate.

Secondly, as you go to make an offer on a home, the seller and their realtor may request confirmation that you're "bankable". This will help them understand the security and higher likelihood of your transaction closing and that they're not wasting any time as you place offers on the home. In this case, the prevailing logic goes that the more security that you can offer the seller, the more likely that they will be to accept your other conditions of price, time to close or other.

Great!

So how do you get a mortgage preapproval to protect you as you shop for your new home or rental property?

Step 1: Surf on over HERE to submit your personal information to our team.

Step 2: Our team mates will contact you very shortly thereafter to review your needs and process your request right then and there. Upon completion of this conversation, we will submit your file over to our lenders for review.

Step 3: Normally within 24 hours, we will have your preapproval ready and in your hands!

Protecting your rates through today's surprising volatility,

The Trimor team!

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