Stress test yourself!

November 13, 2017 | By | Add a Comment

Stress test your own debt - toronto mortgage broker ingrid mcgaugheyDo your own personal stress test

There’s been a lot of “blah, blah, blah, waaaah!” about the latest rendition of the mortgage stress test (even from me, I admit it!). These days, there’s no 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 the remote possibility of a 2% rate increase over their actual mortgage rate. Before you freak out about this, take a few deep breaths. Bottom line, the focus continues to be on 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 feel it is very important 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

Now the folks in Ottawa responsible for mortgage rules are setting a new minimum “qualifying interest rate” for uninsured mortgages. Basically, any mortgage at 80% of the property’s value or less, will now be subject to a new stress test. This new federal requirement is intended to be a safety measure to protect borrowers just in case mortgage rates were to rise by about 2%. Most experts feel this is highly unlikely due to constraints of the Canadian economy. If they did increase that dramatically, we would have much bigger economic challenges to contend with.

Why the advantages of putting down more than 20% are (almost) gone

With these new regulations, we have to calculate whether you could afford your mortgage payments as if your interest rate was 4.99% or higher – even though today’s actual 5 year fixed mortgage rate can be less than 3%. 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. And of course, if you have a smaller mortgage, that also means smaller monthly mortgage payments. But, putting down less than 20% has the advantage of a slightly more reasonable stress test – right now it’s pegged at 4.99% flat, rather than floating at 2% over whatever your actual rate is. And a high ratio mortgage has to be insured, which can result in a better interest rate, so you might 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 very illuminating. Let me know if you’d like to discuss your own situation. I’m happy to help!

 

 

Filed in: Canadian Mortgage News, First Time Homebuyer, Mortgage Planning, Purchase | Tags: , ,

About the Author (Author Profile)

I’m a Toronto Mortgage Broker. My focus is on saving people time and money in financing and re-financing their homes. Am passionate about helping people make informed choices, giving back, and helping to improve financial literacy in Canada.

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