Pre-Approvals: A Dying Breed?

Pre-approvals are something many lenders could do without.  The problem (from a lender’s perspective) is that people get pre-approved and then frequently don’t close.

One bank that recently did away with pre-approvals in the broker channel was rumoured to be losing $20 million a year on them.

Pre-approvals are pretty expensive, and the return for lenders is debateable.  In most cases, less than one-third of pre-approvals actually close.  Meanwhile, the lender is tying up human resources to process the applications, as well as capital to hedge the rates (if rates move adversely, the lender is on the hook, so lenders pay to lock-in the interest rates using derivatives).

In recent weeks, some very big-name lenders have halted pre-approvals--either altogether, or in the broker channel.  Two of the most prominent have been FirstLine (a division of CIBC) and TD.

There are still some good lenders doing pre-approvals but their numbers are dwindling. Among the best is ING.  ING has solid rates, great perks, and they do a full rate look-back (meaning:  if rates fall and then rise again, you automatically get the lowest rate during the pre-approval period).

It’ll be interesting to see what the future holds for pre-approvals.  If we had to guess, more lenders may eventually either:

A)  Eliminate them; or,

B)  Start charging rate premiums (some lenders, for example, already charge 0.10% more for pre-approvals).

We’d love to hear your thoughts and predictions!