If I’m planning to purchase a home, should I get a rate hold? Let’s un-package this together.
In the last 6 years, I have experienced ONE instance of time where my clients benefited from a rate hold. One.
This was wwaaayyy back in December 2017. The Bank of Canada was in the midst of ratcheting up the key lending rate and bond yields were stepping higher.
I submitted a rate hold for a client who ended up purchasing a home, with that lender, and that Mortgage rate. The rate hold worked!!
But so many times, rate holds don’t prove to be of value. Why?
- Rate hold rates are priced at a premium.
Lenders hedge money aside which has an opportunity cost. There is also some administrative cost to holding a rate. - Rate hold rates require the buyer to take possession of the home prior to the rate expiring.
Rate holds are valid for 90 or 120 days. If by the time a client purchases a home and the possesion date is past the rate hold expiration, the rate hold might not be valid. - The lender offering the rate hold might not approve your live Mortgage file?
All Mortgage underwriting is not equal. The Mortgage lender who has your rate hold might not be the Mortgage lender to approve your file. What good is the rate hold then? - Rate holds are NOT pre-approvals.
This is often a confusing point. A rate hold is the Mortgage lender setting money aside and reserving an interest rate for you. A pre-approval is a Mortgage Broker reviewing all anticipated documents for Mortgage underwriting and pre-approving them. Ideally, you also understand the fundamental concept of why you are pre-approved. - Often Realtors and Mortgage Brokers promote the “fear” of rising rates to stimulate lead generation and or client engagement.
I’m guilty of this. I am. And I get how using urgency, scarcity and #fomo is appealing for Real Estate professionals. In some circumstances, there is legit reason for prompting action from prospects. Most times, not. Again, I’m guilty here.
Ok, what are the benefits of a rate hold?
- Piece of mind knowing the buyer is protected from higher rates.
Rate holds hedge money and a Mortgage interest rate aside. If that helps my clients sleep at night, let do this! - Having your credit checked so the buyer knows his/her credit is eligible for Mortgage qualifying.
The minimum documentation required for a Mortgage lender to hold a interest rate for you is a credit check. At this point we’ll know if your credit is at or above the minimum threshold for pre-approval. - Limited documentation is required to submit a rate-hold application to a Mortgage lender.
A service level agreement and credit check are the minimum documents required for a rate hold.
Let me pull back the curtain, once and for all, to discuss the truth about rate holds.
I’m guilty of using fear in marketing.
Honestly, fear moves people. For example, I walk into a packed movie theater and say to everyone, “the building is on fire, everyone out!”. I would consider getting up and moving. How about you? I would FOR SURE get up and out of the theater if the person making the announcement appeared to be a uniformed firefighter.
Fear is everywhere, not just in marketing. The cultural phenomenon of #fomo (fear of missing out) is a real thing. I think about my #fomo moments…
There is currently a sale of Adams Peanut Butter at Superstore. The sale is on for a limited time and my mom is encouraging me to purchase at the discounted price.
Here’s another example of my #fomo …In 2011, my brother and friend Scott invited me to join them on a epic backcountry camping trip on the West Coast Trail. Enter #fomo. I joined.
Back to the movie theater scenario. In a different example, I do not use fear to motivate people. I might say to the packed theater, “it is a beautiful day outside, everyone out!”. I might second guess my time in the theater and move outside. Most times not.
Rate Hold #FOMO
Rate holds are like the intersection of where #fomo meets rational thought.
Chad “I guess I’m quoting myself now” Moore
I think I’ve made the reasonable case that fear, and the more appealing new cultural hashtag #fomo, motivates people. I think we could all drum up a personal story of how #fomo seeped into our lives.
Truth talk. I’m a Mortgage Broker. I also market my services (shocking). And I’m guilty of using #fomo as a marketing tool; particularly in my early years of establishing my business. Now I prefer to educate and pull people who want to work with me.
Continued truth. Realtors and Mortgage Brokers use the fear of rising rates to stimulate a response from prospects. Last week was a great example …“Bond markets are up, COVID vaccine is coming, rates are set to rise!”.
The bond market was up. There is news of vaccines coming to market. It looked like rates were set to rise. So, what’s the point, Chad?
Here’s The Point …
Awareness. I hope what you’ve read above provides some context into some of the messaging you’re hearing and why. I hope some of my points above also help provide context around rate holds. I really do.
Honestly, submitting a rate hold for my clients, who want one, is not a big deal at all. And I get the thought process behind wanting a rate hold. Got it.
Here’s The Distinction …
I think what clients really want is to feel like they understand and know they are getting a really good deal (well, that’s been my experience in working with hundreds of people anyway).
The distinction is the difference between having a rate hold and being pre-approved.
A rate hold is the Mortgage lender hedging money aside for future deployment into the housing market. There is an opportunity cost to hedge this money which is why there is a premium on the interest rate for the “held” money. The Mortgage lender is not reviewing documents or underwriting the client’s file for a rate hold.
A pre-approval is a internally underwritten file requiring all anticipated Mortgage documents be sent in for review, prior to the Mortgage lender requesting them for review. Pre-approvals are not 100% guaranteed which is why home buyers write their purchase offers subject to financing.
Note: If you have been pre-approved, please choose to write your offer to purchase subject to financing.
What About Purchasing A New Home? Possession Is 6 Months Away!
Let’s talk about it.
Home buyers purchase from builders regularly. Look at Calgary’s suburban sprawl as evidence. Even today, more and more new communities are approved for development.
Typically, buyers purchase a new home and the planned possession date is 6+ months from signing the contract. Would a rate hold make sense in this case?
Yes.
Let’s talk about it.
As a independent Mortgage Broker, I have access to branded and non-branded Mortgage lenders. Typically, branded lenders offer longer term (6+ month) rate holds. One of my lenders who offer these rate hold terms is ATB.
Currently, the difference between ATB’s 6 month rate hold and a rate I could reserve for a client today is about 0.30%.
With a live builder purchase, nearly all Mortgage lenders can offer a 4 month rate hold. At the 4 month mark to possession, a rate lower by 0.30% can be reserved for you. My thought is, during that 2 month difference in a rate hold vs no rate hold scenario, will market Mortgage rates move higher than 0.30%? Honestly, that is possible. My thought is very unlikely though.
What about 9-12 month rate holds?
The difference between ATB’s 9+ month rate hold and today’s market rates is 2.98%. That’s quite the premium to pay for the comfort of a rate hold. Could market rates rise by 3%? Possibly. If market rates did increase that much, I think our economic world would burn down, so taking possession of a new home might be a different priority?
I think there is a time and place for long term builder rate holds. However, I also think considering the Mortgage lender offering the rate hold, terms of their Mortgage contract and what happens after you take possession of your home are worthy to note.
Conclusion:
I’ve fulfilled a bucket list item. #quotingmyself.
We also discussed some of the pros and cons of a rate hold, who benefits and what is actually accomplished with a rate hold.
Short term, there will be fluid movements of fixed Mortgage rates in Canada that move up and down. Based on what is actually happening in the economy, policy makers are determined to pin Mortgage rates to the floor over the foreseeable future.
A rate hold is simple enough to accomplish for you, and I’m happy to. However, I hope this post is helpful for context around rate holds, fear of missing out, and pre-approvals.
More questions? Reach out! chad@canadamortgagedirect.com OR 403-809-5447.
Talk soon,
Chad Moore
