When it looks like rain, do you pack an umbrella? We all plan ahead, just in case things don’t work out as anticipated. Why should your mortgage, probably the most significant financial move of your life, be any different? A mortgage stress test is an analysis of your planned mortgage rate, possible increases in interest rates, and refinancing possibilities. These factors are compared to your anticipated income, allowing you to look ahead and see what you will able to afford. If you’re ready to get started with finding the right mortgage for you, a mortgage stress test is the
What is a mortgage stress test?
- Rainy day fund. In order to pass a mortgage stress test, you will need to qualify at a rate higher than what you will actually pay. The purpose of this is to ensure homebuyers are factoring in a contingency fund for unforeseen costs.
- Say you’ve qualified for a mortgage rate of 2.79%. Currently, the Bank of Canada’s qualifying rate is at 5.34%. What this means is that you must qualify to pay the higher rate in order to pass the stress test, even though you will actually be paying the lower rate.
- As of January 2018, homebuyers entering into a high-ratio mortgage (any mortgage with a down payment of less than 20% of the home’s purchase price), or into an uninsured mortgage (a mortgage with a down payment of 20% or more) are subject to a mortgage stress test.
How do you find out the minimum monthly payment you’ll need to afford to qualify?
- Keep interest in mind. Depending on the kind of mortgage you have, future interest rates can be a major factor in estimating what you’ll be paying down the line. Variable rate mortgages are particularly impacted by interest rates, but even those with fixed rates may be in for a surprise when it’s time to renew. As a general rule of thumb, plan for an increase of 2-3% every five years.
- The stress test allows you to compare your income with the highest reasonable mortgage rate that you may encounter. What if, after five years of a fixed rate of 2.79 percent, your mortgage rates increase to the current qualifying rate 5.34 percent? Answering these questions now can help you make decisions on your down payment, mortgage rates, and even in budgeting for a home.
When calculating a stress test, there are many factors to consider. Current and future employment, changes in income or expenses, and shifting families can all play into the final figure of what you’re able to afford. Not only will complying with this test qualify you for the right mortgage, it will provide you with security and peace of mind throughout the term of your mortgage contract.
If the mortgage stress test is sounding a bit… stressful, don’t worry. Canadians everywhere face difficulties when applying for a mortgage due to a lack of research and preparation. If you’re looking into how to calculate your own mortgage stress test, you’re well on your way to owning a home, with financial stability and a great rate to boot. If you have questions about your mortgage rate, the Bank of Canada’s qualifying rate, stress tests, or anything else in the world of becoming a homeowner, don’t hesitate to contact Milka Lukacevic and the TMK team at The Mortgage Centre today!