Mortgage pre-approval does not last forever

Of course we all know that nothing lasts forever (sigh), but no one wants to find out that the timer on their pre-approval is about to expire, and with it, a much preferred lower interest rate.

We received an anxious call this week from a realtor partner whose client is distraught over his mortgage pre-approval with a major chartered bank. Four months ago they secured a pre-approval for an $800,000 mortgage at a two year fixed rate of only 2.19%, and he did not realize it would expire this week.

His buyers have finally found a property they wish to buy and when they contacted the bank to share their good news, they were told their rate is no longer available. If they want the same mortgage now, the going rate is 2.79%.

Their monthly payment will increase by $246…OUCH!

What went wrong?

Typically mortgage pre-approvals hold the interest rate for 120 days. That is usually enough time for buyers to find their ideal home. If you are buying from a builder, with a longer closing period, you can arrange a far longer pre-approval, but the rate will be much higher than best rates available in the near term.

Our friends’ clients thought that as long as they submitted their final purchase application within 120 days they would be fine. But no, the actual purchase must fund within 120 days. That’s a big difference.

When you consider most offers to purchase close 60 to 90 days after the offer is accepted, then you really only have 30 to 60 days after you secure your pre-approval to find the home you want.

In recent years, this would not have been a big deal, as mortgage rates have been at record lows for quite some time. But since August of this year, the Bank of Canada has raised its overnight rate twice already, with more increases in the forecast before year end.

Along with this came mortgage rate increases. Variable rate mortgages are now 0.5% higher than they were in August, and five year mortgage rates have actually increased even more — at least 0.7%.

What could have been done?

Mortgage brokers typically know about pending rate increases before anyone else. And often they are given a friendly warning that their lenders are planning to increase their rates at midnight that night.

At Ross Taylor & Associates we notified all of our pre-approval clients who we thought might be affected, and suggested they either step up their buying efforts, or we re-apply for a mortgage pre-approval, and reset the clock to a new 120 day period.

Had this been done here, our friends’ clients would have opted for a new pre-approval would have neatly extended their rate hold-out three months beyond where it currently sat.

The lesson here is to pay close attention to what is going on around you, and be prepared to adapt to new information. It’s hard to do that with our busy lives, so do your family and yourself a favour and work with professionals who live and breathe this stuff, and who will be thinking of your best interests …even while you sleep.