Pre-approved mortgage vital in these uncertain times

Canadian mortgage interest rates have been yo-yoing this year. From recent highs in the first quarter, both short and long term rates are now near the lowest level in four years. And, while most analysts expect interest rates to remain close to the prime lending rate over the next few months, the truth is no one really knows.

As the events of September 11 revealed, the world has changed and volatility in mortgage interest rates is a small part of the damage.

Within days of the terrorists attack on New York and Washington, Canada’s major banks had decreased mortgage rates virtually across the board, with one-year closed rates down 0.55 points to 5.35 percent, and a five-year closed mortgage down to 7.15 percent from 7.3 percent.

Where will mortgage interest rates be in three months? Ask 10 experts and you will get 11 estimates.

If you are planning to buy a houseor cottage this year it is therefore vital to get a pre-approved mortgage before you start house hunting.

The purpose of a mortgage pre-approval is to confirm in writing, in advance, the maximum amount of money on which you can rely for mortgage purposes and to get confirmation of the mortgage rate you will pay. This will help you be realistic when you are searching to buy a property and negotiating a purchase.

When you apply for a pre-approval it is much the same as applying for a mortgage. You must show your total income, and sources, provide information on other loan payments and allow a credit check.

After going through your financial information, the lender will pre-approve you for a specific mortgage amount for a set period of time. For example, you may be approved for a $200,000 mortgage with an interest rate guaranteed for 30 to 90 days, depending on the stability of market interest rates.

If the mortgage interest rate drops before the lender advances the funds for a mortgage, you are given the lower rate. If the rates rise, you are given the rate at the time you had the mortgage pre-approved.

A pre-approval also allows you to narrow the search for a homeor cottage to the exact amount of mortgage you can expect to have.

There is a further advantage of working on the mortgage details before you have even seen a property you want to buy. When discussing the pre-approval you can get advice on the various types of mortgages and payment options and negotiate the best possible deal for your situation.

For instance, you can confirm the amount of downpayment needed, whether you want a ‘closed’ mortgage or a more flexible ‘open’ mortgage, the amortization term and the schedule of payments.

Finalizing all these details before you face the pressure of a home buying closing date will give you the time to clearly understand all of your mortgage options,

There is always the condition, of course, that the lender must appraise the actual property being purchased before the funding is approved. This provides the lender with the opportunity to make sure the security is suitable.

Before you begin serious house/cottage hunting, you should nail down exactly how much you have for the down payment. Many buyers go with the 5 percent down program from Canada Mortgage and Housing -- available to all buyers -- but you may want to use your Registered Retirement Savings Plan funds, or other sources. In any event, know where the cash is and how quickly it will be available.

In these uncertain times, pre-approving your financial plans can be the most important step in the home buying process.

By: Frank O'Brien
October 25, 2001

Copyright 2001 Inman News Features
Distributed by Inman News Features