It’s not a condition that you need to get your health tested to be able to handle the stress of looking and purchasing a home.
Basically the Government has put in place a procedure that all banks and mortgage brokers have to use in order to qualify a client for a mortgage. While the majority in the industry feel this is an unfair policy and will effect homebuyers and sellers it looks like it is here to stay for now.
So what is a mortgage payment stress test?
Simply it is using a higher rate of interest to qualify a client for a mortgage. They feel this will alleviate any future interest rate increase shocks to a client. (by qualifying you for a higher rate today will protect you from any future rate/payment increases)
While I could go through how I do not agree with this strategy/policy and how it will make it harder for people to qualify for a home (or at least a home they want) that is not what this blog is about.
I am just going to show you what to expect moving forward.
As of October 17, 2016 these new rules have taken effect. This is what they stated
“Effective October 17, 2016, all insured mortgages must be qualified at the Bank of Canada’s Benchmark Rate. This rate is published each Monday and can be found on the Bank of Canada website”
The Bank of Canada rate at the writing of this post was 4.64%. Current 5 year fixed rate mortgages are between 2.39-2.59%.
Let’s look at the numbers to see how this effects a client. We will use a client/couple who can show a gross yearly income of 80k total. We will use a property tax amount of $2400/year. We are also required to use a general heating cost to qualify clients and this amount equates to $125/month. For this example we will also take into consideration a car loan with a monthly payment of $500/month and that the client has around 3k balance on credit cards. (we use 3% on any revolving credit balances)
Based on the old model this client would have qualified for around 400k to purchase a home. Under the new rules this same client will now only qualify for around 315k to purchase a home.
So as you can see you are going to qualify for less of an amount. If you heart was set on the 400k home you are going to have to pay down debt, make more money or put down a larger down payment.
By using a mortgage broker you will have more options as we deal with various lenders and work for you. We are not employees of the bank or lender.
Ensure you are doing a budget. Work to get a down payment and reduce your debt. If you want to be a homeowner then you need to look to re-structure how you borrow money. Do you need a $600/month car payment or can you buy cheaper and get one for $300/month. (while you can live in your car – who wants too?)
Little things will go a long way to ensure you get into a home you want.
Today’s way of getting a mortgage is not like our parents so ensure you seek out a professional that will work for you. Remember I am not paid a salary or by one specific lender. Bottom line – I am your broker working for YOU.
Eric Gall is the owner of Avanti Mortgages (operating as a mortgage broker for TMG – The Mortgage Group Atlantic). If you are purchasing, refinancing or renewing your mortgage contact Eric or check out his website and apply online. If you are a First Time Homebuyer then get your free report here. If selling/refinancing a home get your free report here to avoid some common mistakes.