Rate holds and pre-approvals: what they protect, and what they don't

Before you shop: know what you are asking for

It helps to separate two questions. How much can I borrow? is what a pre-approval tries to answer. At what rate? is what a rate hold answers, for a limited time. A lender can give you both together, and you can ask more than one lender for both.

Gather the basics before you apply: proof of income, details of your debts and monthly obligations, your down payment and where it is coming from. Knowing your down payment matters for the rate, because mortgages with less than 20% down are insured and priced differently. See insured vs uninsured mortgage rates.

Applying for a pre-approval

A pre-approval is based on what you tell the lender and the documents you provide. The lender looks at your income, debts and credit history, and mortgage borrowers may need to pass a stress test to qualify. The result is usually a maximum amount and a set of conditions.

A pre-approval amount is a ceiling, not a target. Ask what it assumes, because a different rate, amortization or down payment can change both the amount and the payment.

• What rate, term and amortization does the pre-approval assume?
• Is it for an insured or an uninsured mortgage?
• What conditions still have to be met before final approval?
• Does it come with a rate hold, and if so, for how long?

While the hold runs: what it protects

A rate hold matters most when rates rise while you are still house-hunting. Suppose you hold an illustrative 4.59% and, a few weeks later, the lender reprices to 4.89%. On $500,000, the hold saves $84.36 a month and $7,197 of interest over the 5-year term, as long as you close within the hold period and meet its conditions.

Fixed rates can move between Bank of Canada announcements, because they tend to follow Government of Canada bond yields. Our guide to how bond yields move fixed mortgage rates explains why.

If rates fall during the hold

A rate hold protects you against increases; whether it also lets you benefit from a decrease depends on the lender. Ask, when you take the hold, whether the lender will lower your rate if its own rates drop before closing, and get that in writing. If it won't, a competing quote may be the more practical way to benefit.

Either way, a held rate is still a quote to be judged. The illustrative held rate of 4.59% gets a mark of 80 out of 100 ("grade B") against a best published rate of 4.34%, worth about $5,985 over the 5-year term. Because the checker's fixed benchmark is updated for later bond-yield moves, rescoring your held rate shortly before closing shows whether the market has moved past it.

When you find a home: from hold to commitment

The new mortgage script has wording for asking a lender to match a competing quote at this stage, and our guide to features worth more than rate covers the fine print.

1. Check that the hold's expiry date is after your expected closing date. If it isn't, ask about extending it before you firm up an offer.
2. Confirm the rate, term, amortization, payment and insured status in the mortgage commitment.
3. Read the prepayment information box at the start of the agreement: privileges, and how the penalty is calculated.
4. Ask about any fees, cash back conditions and whether the mortgage is portable.
5. Grade the final rate in the fixed mortgage checker or variable mortgage checker before you sign.

At renewal: a different kind of hold

Renewals come with a built-in protection. A federally regulated lender must send a renewal statement at least 21 days before the end of your term, and the statement must say the rate offered won't increase until the renewal date. That is effectively a hold on the offer, though not a promise that it is a good one.

If you are thinking of switching lenders at renewal, ask the new lender how far ahead of your renewal date it will hold a rate, and what it needs from you to do so. Starting early gives you time to compare. The renewal timeline and the renewal page set out the steps.