What Is a Mortgage Stress Test?
Getting the green light for a mortgage to finance the property of your dreams is a complex and long process as it is. And that’s before people find out that they need to pass a mortgage stress test that will define if they are eligible for a mortgage or not, and how large of a loan. Don’t worry though, the more informed you are about everything regarding mortgages and loans, there will be fewer surprises around the corner for you. Let’s take a look at what is the mortgage stress test, and everything you need to know regarding it.
What Is A Mortgage Stress Test?
A mortgage stress test is . . . nothing like the tests you took in high school so let out that breath you’ve been holding in. The lender of your choice takes your financial standing into consideration and the amount of money you want to take out on a loan to finance your property, and essentially “runs” it through a simulation. Based on the information provided, the lender will be able to calculate how much stress your household can endure throughout your amortization period. Keep in mind that mortgages are often granted on a basis of 25+ years and the financial standing of the country can change a lot in that timeframe. Thanks to the calculations, the institution will be able to test how well you can withstand financial stress in the case of inflation, rising interest rates, and other debts that you may have.
Since lenders are always undertaking a risk when it comes to lending hundreds of thousands of dollars, they need to be sure that borrowers will be capable of consistently making the repayments in a timely manner. The mortgage stress test ensures lenders that the borrower isn’t making the monthly repayments by the skin of their teeth, at least not in the next few years to come and that they will be able to withstand some financial fluctuations. It’s important to note that you need to prepare for something called a mortgage stress test renewal if you make changes to your mortgage from the same lender down the line. That refers to refinancing your mortgage, taking out a home equity line of credit, changing the lender, and so on.
Ontario Mortgage Stress Test
What financial records or documents are taken into consideration to determine whether you pass or fail the stress test in Ontario, Canada? That includes the amount of money you want to borrow, the amortization period, your household income, your debt-to-income ratio, household costs, and perhaps additional documents upon request. In order to pass the mortgage stress test, you need to be in line with something called a qualifying rate for mortgages. The qualifying rate for mortgages can be different from country to country, sometimes even between provinces. The current mortgage qualifying rate is around 5.25% or 2% more than the rate defined by your lender. You can even do the rough calculations yourself to estimate if you are more or less likely to pass the stress test. There are online new mortgage calculators available that can also help you along.
Here is a brief look at how you can check if you’ll pass the stress test. Assuming you want to qualify for a $400,000 mortgage and your lender has presented you with a 3.50% interest rate, you will have monthly payments of around $1,997.08. To stress-test your mortgage, you must demonstrate that you can afford to pay more than that rate plus an additional 2% or the benchmark rate which is currently 5.25%, whichever is greater.
What Happens if You Fail a Mortgage Stress Test
The answer to this question is actually quite simple, you will be found ineligible for the mortgage you applied for. This means that the majority of lenders will also most likely consider you ineligible since they conduct the stress test with the same current mortgage qualifying rate. What can you do moving forward from a rejection? Your next best approach is to look into what alternative lending options are available, as you’ll see in the next section.
Is there anything you can do to reapply later and pass the mortgage stress test instead of not meeting its requirements? Of course. You can save more money towards your down payment and provider a larger amount. Additionally, paying off more of your currently existing debt or increasing your household income can immensely impact your stress test results as well. Don’t forget that lenders take a look at all of your information in full to determine if you are a reliable borrower or not so ensure that something like your credit score is high enough to qualify too. Adding on a guarantor or co-signer could also be an option or obtaining a gift from family can be options to explore.
How To Avoid Mortgage Stress Tests?
Nothing is impossible. Difficult, yes, but not impossible. Essentially, you can avoid mortgage stress tests altogether in some circumstances. If you are opting for a mortgage from a regulated bank, a stress test is inevitable. However, if you choose alternative lenders instead, some may not carry out a stress test. Alternative lenders can be credit unions, private lenders, and others. You can ask beforehand if a stress test will be conducted before you are approved for the loan. Keep in mind that alternative lenders often offer higher interest rates, limited loan budgets, and potential extra fees.
Get in touch with me today if you are in search of a mortgage broker in Canada. I, Jodi Habel, will help you secure financing for anything from a first-time homebuyer’s mortgage to a mortgage refinance for debt consolidation.