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Mortgage stress test scenarios at Renewal/Refinance

General Michael Distefano 17 Apr

Instead of long paragraphs, we made it easy with just numbers for your understanding.

SCENARIO 1: Your current mortgage is a five-year fixed-rate term. Your rate is probably at or below 3%. Let’s use 2.89%, as many of my clients were averaging this rate back then. Five years ago, you were qualified using your actual rate. So, in this case, 2.89%. Let’s say you took a 25-year amortization with an original balance of $400,000, equaling $1,871 in monthly payments. Today, your balance is $340,000. How much income did you need to qualify back then? $73,000 per year.

Fast forward to today. It’s renewal time and you’re ready to shop for rates. Of course, your Mortgage Broker has contacted you or you’re going to call an experienced Mortgage Broker to ensure you’re getting the best rate and terms. Historically, we know that banks don’t offer their existing clients the absolute best rate at renewal time. This is just the way it has always been. But, it’s gonna get worse…

And now for some potentially bad news: Today, you heard about a better deal at a competing lender. Naturally, you’ll qualify given that you’ve paid your mortgage perfectly for five years, right? Well, not necessarily.

Today, you must requalify using your new rate (let’s use 3.59%, as this is a competitive rate today) plus 2.00% (infamous stress test) for a qualifying rate of 5.59%. Using this new higher qualifying rate, regardless of the now shorter amortization and lower mortgage balance, you’ll still need a higher qualifying income of $88,000.

Think your bank doesn’t know this? Guess again… they know and they love it. And, chances are, you won’t see the best rate offer come renewal time. (This is where I would strongly recommend speaking with an experienced Mortgage Broker. Having access to a variety of lenders in addition to banks.)

SCENARIO 2: It’s renewal time and you want to increase your mortgage to buy a car, install a new furnace/air conditioner, renovate, or even send your kids to school. Perhaps you took out a loan or used your line of credit for some expenses you accrued waiting for renewal time. (And, of course, you’re paying a higher interest rate as all non-mortgage debts have higher rates than your mortgage). Using the same example as above, your current mortgage balance is $340,000, but you want to go back up to a $400,000 mortgage to roll in those other higher-interest debts.

To qualify for this same $400,000 mortgage amount you originally started with five years ago, you’ll now need to earn $108,000 per year. That’s a $35,000 higher annual income – a 52% increase. Now, how does this make sense? It doesn’t, but it’s the new reality.

There are calls for the government to pull back on the stress test – and for good reason. The example above is playing out hundreds of times a day across the country.

Don’t despair. There is hope. And there are solutions. Your interest is my only interest.

P.S.
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Michael Distefano
Mortgage Agent and Manager of operations
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Niagara’s largest Mortgage Broker
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