There’s been a lot of nervousness about the latest rendition of the mortgage stress test. There’s now only a minimal purchasing power boost if you put more than 20% toward your home purchase rather than 5%. That’s because everyone putting more than 20% down now has to qualify for a 2% rate increase over their actual mortgage rate. The solution? Careful mortgage planning.
Your mortgage plan should always be personalized to *you*
As a mortgage professional, I have historically built my clients’ mortgage plan around their “personal stress test” and comfort level. How much the mortgage lender will lend a borrower may not always be what your budget can truly manage. Maxing out your mortgage can result in a whole other kind of stress, and often doesn’t make sense. I always strive to understand a borrower’s personal financial expectations and goals, as well as expected life changes, before determining the budget or cash flow that would be the best fit.
What the federal mortgage regulators are saying
The folks in Ottawa responsible for mortgage rules set the minimum “qualifying interest rate” for uninsured mortgages. Basically, any mortgage at 80% of the property’s value or less, is subject to a new stress test. This federal requirement is a safety measure to protect borrowers just in case mortgage rates rise by 2% over the rates that are in place at the time you book your mortgage.
Why the advantage of putting down more than 20% is somewhat reduced
With these regulations, we have to calculate whether you could afford your mortgage payments as if your interest rate was the Bank Prime Rate or higher. Whether you put down 5% or 25%, some version of a stress test applies. The only benefit left is being able to use a 30 or 35 year amortization for down payments of over 20%, which can add a bit more purchasing power. Of course, if you have a smaller mortgage, that also means smaller monthly mortgage payments. And a high ratio mortgage has to be insured, which can result in a better interest rate, so you could end up saving money there. If it sounds like a wash, that’s because it kinda is.
Worried about your own sensitivity to a rise in interest rates?
Do your own stress test! A great article published a few years ago by Globe and Mail columnist Rob Carrick walks you through checking out your own financial vulnerability, together with some solutions if you’re getting into the trouble zone. One solution Rob missed: if you already own a home and have equity built up, and have unsecured debt with high monthly payments, you may be able to significantly ease your cash crunch by consolidating the debt into a mortgage or home equity line of credit. Then, you can focus on paying down the mortgage with any extra cash. As Rob Carrick says, “Less debt gives you more immunity to higher interest rates.”
Stress test yourself! What you need to know about the Canadian mortgage stress test
Do your own personal stress test
There’s been a lot of nervousness about the latest rendition of the mortgage stress test. There’s now only a minimal purchasing power boost if you put more than 20% toward your home purchase rather than 5%. That’s because everyone putting more than 20% down now has to qualify for a 2% rate increase over their actual mortgage rate. The solution? Careful mortgage planning.
Your mortgage plan should always be personalized to *you*
As a mortgage professional, I have historically built my clients’ mortgage plan around their “personal stress test” and comfort level. How much the mortgage lender will lend a borrower may not always be what your budget can truly manage. Maxing out your mortgage can result in a whole other kind of stress, and often doesn’t make sense. I always strive to understand a borrower’s personal financial expectations and goals, as well as expected life changes, before determining the budget or cash flow that would be the best fit.
What the federal mortgage regulators are saying
The folks in Ottawa responsible for mortgage rules set the minimum “qualifying interest rate” for uninsured mortgages. Basically, any mortgage at 80% of the property’s value or less, is subject to a new stress test. This federal requirement is a safety measure to protect borrowers just in case mortgage rates rise by 2% over the rates that are in place at the time you book your mortgage.
Why the advantage of putting down more than 20% is somewhat reduced
With these regulations, we have to calculate whether you could afford your mortgage payments as if your interest rate was the Bank Prime Rate or higher. Whether you put down 5% or 25%, some version of a stress test applies. The only benefit left is being able to use a 30 or 35 year amortization for down payments of over 20%, which can add a bit more purchasing power. Of course, if you have a smaller mortgage, that also means smaller monthly mortgage payments. And a high ratio mortgage has to be insured, which can result in a better interest rate, so you could end up saving money there. If it sounds like a wash, that’s because it kinda is.
Worried about your own sensitivity to a rise in interest rates?
Do your own stress test! A great article published a few years ago by Globe and Mail columnist Rob Carrick walks you through checking out your own financial vulnerability, together with some solutions if you’re getting into the trouble zone. One solution Rob missed: if you already own a home and have equity built up, and have unsecured debt with high monthly payments, you may be able to significantly ease your cash crunch by consolidating the debt into a mortgage or home equity line of credit. Then, you can focus on paying down the mortgage with any extra cash. As Rob Carrick says, “Less debt gives you more immunity to higher interest rates.”
Let’s run the numbers
I always walk my clients through the qualifying ratios so they can see where they stand, for themselves. It can be super helpful. Let me know if you’d like to discuss your own situation. I’m happy to help!
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