Understanding the mortgage stress test

June 1, 2021

As of June 1, 2021, a new mortgage stress test has come into play. Here’s what you should know before you apply for your next home loan:

The new rules that banks must follow are to protect you, the borrower. Interest rates have been so low, so it is easy to believe that the rates will not rise, but they will. Therefore the rules are in place to ensure that you will be able to afford your home when the rates eventually rise and not default on your mortgage payments which could end with you losing your home.

When applying for a mortgage, your credit score will determine how much you can borrow. The financial institution will then offer a mortgage interest rate corresponding to that score. In addition to the rate offered, it will make a future calculation based on a higher future rate increase of an additional percentile amount. For example, borrowing $500,000, with a rate of 1.78%, means that you’d need to prove that you can make payments of $2,981 per month (at 5.25%) though the payment would actually be less at $2,063. Previously the 5.25% pre-July 1 test guideline would have been 4.70%.

As a licensed mortgage provider, we are here to answer your questions.

 

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