mortgage stress test

Under the new mortgage stress test implemented by the Federal Government as of October 2016, may limit new home buyers to the amount of home they can afford and qualify for.

The move sparked by potential hikes in interest rates and increasing housing prices, is aimed at insured mortgages up to terms of 5 year terms. This will impact buyers by making them not qualify as much of a house since the benchmark rate used to qualify is at 4.64% even though the rate they may receive could be substantially less. Only borrowers with a down payment of less than 20% will be impacted at this time. Also this is a way to shift some of the risk associated with insured mortgages from the government.

Since the qualify rate is 4.64%, the TDS or Total debt service ratio will increase forcing the borrower to qualify for less of a home. The reasoning behind this is the speculation that interest rates are on their way up, and the question becomes will the borrower be able to continue to afford the mortgage payments if rates do rise.

Let’s look at an example:

Pre Stress test:

Annual family income:  $125,000

Assuming other monthly debts: $750.00

Qualifying rate:  ( actual borrowing rate) 2.49%

Amount qualified for:       $$703960.35

*** estimated property taxes $4200 per year

After the mortgage stress test:

Maximum purchase price qualified for:  $ 561214.72

Difference is $ 140,000


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