How To Stress Test Your Mortgage
March 15, 2022 | Posted by: Ronice Harrison
How would you, as a potential homeowner, cope with your mortgage payments in the event that your interest rate rises, or you suffer a financial emergency like unemployment?
That’s exactly what a stress test is for.
Stress testing your mortgage is east. Once you answer some simple questions, you too can know if you mortgage will pass the stress test.
What is the Mortgage Stress Test?
Basically, the mortgage stress test was designed to alleviate Canada’s household debt issue and prevent Canadians from getting themselves into trouble by taking on a mortgage that’s too big for them. As of June 1, 2021, there are two different qualifying rates under the mortgage stress test.
In order to pass the mortgage stress test, you need to qualify at your contracted mortgage interest rate plus 2% or 5.25%.
If you were to qualify for a mortgage rate of 3.25 or below, you’ll undergo the stress test using the Bank of Canada qualifying rate of 5.25%. However, if you qualify for a mortgage interest rate above 3.25%, then your bank will use the other rate which is the mortgage contract interest rate plus 2%.
Want to learn more about the Canadian Mortgage Stress Test in 2022? Read about it here.
How Do You Stress Test Your Mortgage?
See if your mortgage will pass the stress test by answering these few simple questions:
How Much Have You Saved For A Down Payment?
Regardless of whether you have enough to make a 20% down payment, you will need to undergo the stress test. But, knowing exactly how much you have to put toward your down payment will help you determine how large of a mortgage you can afford.
What Interest Rate Will Your Mortgage Lender Offer You?
If you’re in the beginning stages of purchasing a house you can get preapproved with your bank, this way you’ll have an idea of what interest rate you can afford.
How Much of a Monthly Mortgage Payment You Can Afford?
Next, you need to figure out how large of a monthly mortgage you can afford right now. Armed with your down payment amount and interest rate, a good mortgage calculator can help you figure this out
Use the AQRE Lending mortgage calculators to complete this step.
Can You Afford a Rate Increase of 2%, or a Rate of 5.25%?
As per the new mortgage stress test rules, future homeowners need to be able to afford a rate increase of 2% or a rate of 5.45%, whichever is higher.
You can use a mortgage calculator to figure out what your monthly mortgage payments would be at this new higher rate. Ask yourself if you would comfortably be able to afford them.
Usually, this means that the stress test payment is worth 30% or less of your monthly income before taxes.
How to Prepare for the Mortgage Stress Test:
To better prepare yourself for the stress test, consider taking the following actions:
Pay Down Your Debt
As already mentioned, your lender will look at all the debt that you currently carry and factor it into their assessment of whether or not you’d be eligible for a mortgage. The smaller your current debt load, the lower your TDS will be.
In turn, your stress test results may be more favourable. Focus on paying down your high-interest debt first (such as your credit cards) to avoid paying so much in interest charges.
Apply For A Smaller Loan amount
Be realistic about how much house you can actually afford.
You might have your sights set on a home in the $800,000 price range, but perhaps you might make things a lot more financially feasible for yourself if you look at homes in the $600,000 range instead.
Not only will this increase your odds of passing the stress test and getting approved for a mortgage, but it can also free up more of your income and prevent you from becoming house poor.
Crunch Some Numbers
Ask yourself if you could really afford to pay an additional $500, for example, in mortgage payments if rates suddenly increase after you’ve been approved. This is especially true for those with a variable rate mortgage. Being that variable rates are determined based on the prime rate, if you have one, your mortgage is going to be immediately impacted by a rise in general interest rates.
So you might be comfortable making $1,000 mortgage payments every month, but what if you were required to throw in an additional $500? Would that be doable? Or would that throw you into a financial frenzy?
That’s exactly why this stress test was implemented. Should you be faced with higher rates in the near future, your lender would want to make sure you’d still be able to make your payments in full every month rather than face defaulting.
Can I Avoid The Stress Test?
The stress test is designed for federally regulated banks. But some mortgage lenders, such as private lenders or lenders regulated on the provincial level, are not under OSFI’s jurisdiction. As such, lenders like these are not required to put their mortgage applicants through these stress tests the way traditional banks and other federally regulated lenders must.
So, if you’re one of those prospective homeowners, alternative subprime lending might be a viable option for you. However, it’s important to be aware that the interest rates most alternative lenders charge are higher than those of a traditional lender. In fact, with these new housing regulations, alternative lenders have come into a position where they’re able to charge even more for their services. So, while you might qualify easier with a non-traditional lender, it’s good to keep these issues in mind before you apply with one, as it could end up costing you more down the line.
Wondering what other questions you can ask your mortgage broker? Ask these questions first.
Having Trouble? Consider an Alternative Lender
If you’re having trouble getting approved for a mortgage from a traditional financial institution or you’re interested in avoiding the stress test, you may want to consider choosing an alternative lender.
AQRE Lending can help match you with a licensed mortgage specialist who can best meet your needs.
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Fill out our 2-Minute Application, to learn how much you can borrow!
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