In this video we explain the mortgage stress test how to pass it and if the
recent interest rate hikes have actually made an impact that's starting right now.
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little notification belt so you don't miss anything now I'm joined today-- I'm
joined by Mujtaba Syed, manager mobile mortgage specialist with TD Canada Trust
and today we're gonna explain a little bit further on what exactly is the
mortgage stress test.
Yeah so the mortgage stress test is technically what we look
at what the bank accountant has come back to the banks to look at extreme
what-if scenarios to see what happens if at a certain time mortgage rates have
gone a lot higher than at the time clients have qualified to see if they
can still afford to pay their mortgage so for example if someone actually
qualified for a mortgage and the interest rates let's say 2.59 a couple
years ago, they have a time of renewal now interest rates are down to 5.34
or 6% whatever is available and they have no choice but
to renew what those rates-- what the payments are going to look, like can they
really afford those payments? Keep in mind we did have historically local
mortgage payments for the longest time and water people were just on the brink
of qualifying for their houses at that time at those rates but those rates are
not going to be available for too long they might not even be available when
you come off renewal so the Bank encounter and the banks also want to see
that at the time of renewal are you going to be able to afford that mortgage
today five years from today, six years from today, and ten years from today. So
they actually put that stress testing as a what-if scenario to see sure the rates
are not a certain amount today but they could be in the future.
Is it guaranteed? No, but there's a possibility and they want to see that if
you can afford the payments then you shouldn't be having any issues to
get qualified today and that you can afford to make your payment's up any
given time. So that's technically in a nutshell what is a mortgage.
So I know there's a difference between putting more than 20% down and less than
20% down right, so I-- we do have a video on the mortgage stress that's actually
explained in the video above but remember when we talked about it last
time, if it's above 20% you don't need mortgage insurance right
but you still need to do the stress test. If you have less than 20% you
need mortgage insurance but you still need to do a stress test. Right now is
the stress test different for either, or is it the same stress test?
So the stress test
when you're first started off, the stress test was just for in short mortgages so
that means they put in less than 20% down-- you have to deal with the stress test
scenario, and then as of last year they actually made that across the board for
everyone, whether you're putting 20% down or less than 20% down, everyone needs to
kind of qualify and in a way it's an inconvenience for sure but it's better
overall for our housing industry and for the economy so we feel like
everyone can afford their payments and then you're absolutely right Karl, the--
stress test definitely does differ if you're putting less than
20% down, it's a very simple calculation, it's a simple formula to look at the
bank account as a 5 year posted rate and then qualify you on that, no question
is asked, now if you're putting more than 20% down it they can take a look into a
lot of different scenarios they can take a look and see what your term is, what
term are you getting and then they can charge you a 2% premium on top of that
or the 5 year posted bank account or rate whichever is going to be greater so
you definitely want to have the conversation with your lender to see
does it make sense for me go with a 5 year fixed if the 5 year fixed today
is 3.6, 3.7 that's gonna make my qualifying stress test at 5.7 which is a
lot higher than the bank account is, 5 year posted rate or 5.34 or if you
decide to go with something like a home equity line of credit.
They could take a look at to see whatever your pricing is and charge you
a higher 2% premium on that. Once again a great discussion to have with your
lender and your specialist to see what is best for you and also kind of going
to terms to see what's the best rate in term for your financial picture or your
monthly budgeting.
So if you had a choice right now, let's say as a
homeowner or potential home buyer I'm deciding between putting down 20% or
more or less than 20% getting an insured mortgage, is there advice on whichever
one or is it sort of really focused on your lifestyle and more personal?
Yeah 100%, it's a hundred percent based on your
personal preference and your lifestyle and your budgeting to see what's
available right, it's obviously the more you put down just less interest costs,
you don't have to come up with CMAC or defaults insurance premiums which could
be a lot and then their factory right into your mortgage means that now
they're going to be-- you're gonna be paying interest on that and sometimes is
going to be compounding interest where you take a look at the fact that is now,
I don't have the 20% but now I might need to save up longer, or I need to
have my family help me, or ask them for help or
borrow to do a certain amount-- well then you have to see if that's really worth
it for you, maybe buying a house today and getting a cheaper price locking a
price today instead of waiting a few years to save up to extra 20% you might
miss out on the market, you might miss out on any appreciation your house can
do in that time so it's a very personal preference but it's a great
discussion to have with your lender and and if you can explain to them your
concerns and your scenario and they can advise you on best-- what's best to do.
Maybe sometimes it's not best to wait a couple years to save up that 20% and we
can-- maybe the appreciation in that time will be a lot more, maybe three years
from today you can get a lot cheaper house and that same house now it's
costing you a lot more and you've not having really done yourself any benefit
by saving up to get that extra 20%. So once again really have that discussion
go with your personal preference, find out the pros and cons for both, learn
about the products and then decide if what makes sense for you.
Now let's say you're on a fixed or a variable mortgage
rate, does this stress test have any impact on you?
Once again, so it just really-- just depends if you're insured
product or not if you put in less than 20% it doesn't matter at all if you're
going with a fix or a variable, everyone
will qualify at the 5 year Bank of Canada posted rate. Now if we're putting
more than 20%-- 100% it will impact you if you're going with a fixed-rate, they're
going to charge you that 2% premium whatever your fixed rate is so if your
fixed rate is 3.6, 3.7 there's gonna be a 2% premium on that which is gonna be
flat 0.7, or if it's less, let's say it's 2.5 for a five-year posted rate, so
they'll charge-- they can charge you 2% will be 4.5 but then at that time
they will look at to see what the 5 year bank account as posted radius so they
look at the benchmark at 5.3, 4 and whatever is greater than
that so if your 5 year posted rate is greater than the benchmark, that is what--
is your stress test, but if your 5 year posted rate is lower then the bank
of Canada posted rate then you qualify at the bank of Canada posted rate. And for
variable-- even for a conventional mortgage which is when you put more than 20%
down, you always qualify at the 5-year posted rate and that's just because it's a
variable, we just have no idea right, they fluctuate, they can go up and down so for
us to use a stability stress test we will just use the bank account as 5 year
posted rate.
What income do you need to actually pass the stress test-- or is there
like an income level?
Really just depends, you probably-- you can go online and you
could see some grass-- what I like to do and explain to my clients and say the
best thing to do is probably just come in and have that discussion, start a
process for pre-approval to see exactly where you can qualify, a lot of guesswork
that goes into it, there is some credit requirements that we take a look at for
example, if your beacon score is at a certain number, affects our ratios if
you're above 680 the bank of Canada where the banks can actually go to a maximum
44% of your ratios but if your credits not the best-- it's lower than 680,
that ratio automatically now drops to 42%
and there's some other ratios we take a look at so you can find these
calculators online, you can find these graphs online but it's not going to be a
good indicator of to see how much you can qualify with the new stress test, the
stress test has really definitely impacted qualifying as a whole, the best
thing to do is go in and talk to a specialist, talk to someone who's a
professional and who's been-- who can advise you on what to do,
and really get a proper number done. Don't look online and then write an
offer on a house, the worst thing we would want you to do as you fall in love
with the house you write an offer and then you realize after that you don't
qualify for that because you may not have the credit requirements or
maybe some information you read online was not
accurate enough so definitely go in see a professional skier lenders see a
specialist and do a proper pre-approval process so you can actually when you go
shopping, which should be the most funnest part of the house-hunting
experience is you can go in there with confidence knowing that I know I'm
approved for a certain amount and I can get the house.
Is there any way to avoid
the stress test or that's your kind of--
Unfortunately not, there is no way to
avoid the stress test at all. Every Canadian who's looking at
purchasing a house has to go through the stress test so the sooner we can
recognize that and learn the benefits of stress test-- stress test is an
inconvenience but overall I think it is a benefit for for the banks to have and
for us to have so we don't see a major financial crisis or a crash that we've
seen happen in other countries and very similar to happening with what happens
with mortgages when people can't pay. So sooner we get to realize that stress
test is not going anywhere, it's going to be around, the best thing to find out
is see how much can I qualify now with the stress test and then kind of see maybe
we drop down our purchasing price a little bit and see if we can qualify for
whatever is comfortable for us. At the end of the day we still have to end up
making that payment and a home ownership experience is a long-term experience
right, it's not you jump into your first home and that's gonna be your forever
home forever, maybe you start off with something like a starter home and then
you work your way up to see once your financial situation gets better,
and a stress test can really help us kind of realize that and get to what our
dream home could be in the future.
Now finally the last question I have for you is,
has the recent interest rate hikes impacted the stress test at all?
Yes they have so if once again, if you're-- if it's the conventional product, if
you're putting over 20%, you've gone with a-- you decided to go with a five year
fixed rate, if the rates go up like I said, there's gonna be that 2% premium on
top of your five year fixed rate so that would actually raise your stress test
as well meaning it would actually change your qualifications and you would have
to qualify at a higher rate and that means you might qualify for a little
less. Once again, speak with your specialist, your lender and see exactly
where you stand, even after the rates have gone up.
So my question for you is,
has the recent mortgage stress test impacted your ability to buy a home?
Let us know in the comment section below.
So Mo, you have anything else to add?
No I think that's great.
Definitely reach out to your bank-- go speak to your lender or your
specialist and and have that proper pre- approval done so when you go
shopping around you can shop around with confidence.
And remember to watch our
mortgage related videos in the playlist in the description below. Thank you very
much for joining us and we'll catch you next time.
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