Mortgages and pre-approval, explained
Mortgage words get tossed around as if they all mean the same thing, and they really do not. Here is the plain-language difference between pre-qualification, pre-approval, and a mortgage commitment, plus the stress test and the fixed versus variable choice, so you can shop with confidence and a rate that is actually held for you.
Three words people mix up
People say "I got approved" to mean very different things, and the gap between them matters. There are really three steps, and only the last one is tied to the actual home you end up buying. Here is each one, plainly.
A rough estimate based on what you tell the lender. You share your income, your debts, and your down payment in a quick conversation, and they give you a ballpark number. Nothing has been verified yet, so treat it as a friendly guess, not a promise.
This is when the lender checks your actual documents, your income, your credit, your down payment, and holds a rate for you. It carries real weight, because the lender has looked at your paperwork rather than taking your word for it.
The final approval on a specific property you are buying. Once you have an accepted offer on a home, the lender reviews that exact property and issues the commitment. This is the real, final yes, tied to the place you are actually purchasing.
The stress test, and why your number looks conservative
When a lender decides how much you can borrow, they do not simply use the rate you will actually pay. They test whether you could still handle the payments if rates were higher. That built-in cushion is the stress test, and it is the reason a pre-approval can come in lower than you hoped.
You have to qualify at the greater of your contract rate plus 2 percent, or 5.25 percent. So if your contract rate is 4 percent, you are tested at 6 percent. If your contract rate is 3 percent, you are still tested at 5.25 percent, because that is the floor.
None of this changes the payment you actually make. It just makes sure a future rate rise would not push you past what you can carry, which is quietly working in your favour.
Fixed or variable?
One of the first choices you make is fixed or variable. Here is each one in a plain paragraph, so you can tell which suits how you like to sleep at night.
Fixed: your rate and your payment stay the same for the whole term. It is predictable, so you always know exactly what leaves your account each month, no matter what happens to rates in the meantime.
Variable: your rate moves with the lender's prime rate. As that rate shifts, either your payment or your amortization can change, so the cost is less certain but can be lower when rates fall.
The total stretch of time it takes to pay your mortgage down to zero, often 25 years. With some variable mortgages, when rates rise the lender keeps your payment steady and lengthens the amortization instead, so it simply takes longer to pay off.
Why get pre-approved before you shop
Two reasons, and the second is the big one. First, you shop with confidence, because you know your real number and sellers take a pre-approved buyer seriously. Second, a pre-approval holds a rate for you. If rates climb while you are still searching, that held rate protects your budget, so a rate rise mid-search does not blow up your plans.
A first-time buyer across the GTA gets pre-approved with a held rate, then spends a couple of months viewing homes. Rates tick up while they are still looking. Because their pre-approval locked in the earlier, lower rate, their monthly payment stays right where they had planned it, and that held rate saves them real money compared with a buyer who waited until an accepted offer to arrange financing.
The condition that actually protects you
A pre-approval is a strong signal, but it is not a guarantee on any one home. The lender still has to bless the specific property before closing, which is why your offer should carry a financing condition.
A clause in your offer that lets you walk away, with your deposit back, if the final mortgage does not come through. It is the safety net that covers the gap between an accepted offer and a firm mortgage commitment.
We go deeper on this in the making-an-offer guide, where the conditions that protect you live.
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