Here is some excellent information from Easy123 mortgage regarding the new Mortgage Stress Test....
One of the hottest topics of conversation has been the new mortgage stress test. It’s all over the news, and whenever people hear the words ‘mortgage’ and ‘rate increase’ in the same sentence, it peaks their attention. This can be easily misunderstood, so I’m going to bring some clarity to what it actually means for you.
What Is The Mortgage Stress Test?
The stress test is another way of saying qualifying rate. It means that mortgage seekers have to qualify based on a higher rate than the one your payments are based on. It has nothing to do with the rate you pay. It’s all about how much you qualify for.
Last week, the Office of the Super Intendent of Financial Institutions (OFSI) confirmed that the qualifying (stress test) rate will increase from 4.79% to 5.25% effective June 1st, 2021. This is no big surprise as the OFSI floated the idea of a new stress test back in the first half of April. They said that it was a ‘proposed’ change, but that essentially meant that they had already made up their mind. They officially confirmed this last week.
Does This Mean Mortgage Rates Are Increasing?
Just because the stress test rate is increasing, it doesn’t mean that mortgage rates are as well. People hear the words ‘mortgage rate’ and ‘increase’ in the same news article, so will naturally think that mortgage rates are increasing.
But they are not.
Only the qualifying rate is increasing. The actual mortgage rates remain stable.
I’m also hearing more and more talk about locking into a fixed rate before it’s too late. Eventually, rates will increase, but I would not hit the panic button and automatically go fixed. Variable rates are still extremely attractive options. Mortgage rates remain stable, and I would not expect to see any significant increases to mortgage rates anytime soon. Fixed or variable.
The Impact Of The New Mortgage Stress Test
Let’s look at a few examples to illustrate how the stress test works, and how it will affect you. We’ll use a $120,000 household income, 20% down payment and a 30 year amortization in these examples:
Example 1 – No stress test
If you were offered a 5 year fixed rate at 2.19%, and did not need to pass the stress test, then you would qualify for a maximum purchase price of roughly $1,120,000, less your 20% down payment for a maximum mortgage amount of $896,000. Again, this is NOT factoring in the stress test, which means that this is currently not reality. I just wanted to give this example to demonstrate the impact of the stress test, which will be clear in the next example.
Example 2 – Using the current stress test rate of 4.79%.
Once we implement the stress test at 4.79%, your maximum purchase drops to roughly $812,500, with a mortgage amount of $650,000 after your 20% down payment. This represents a decrease in buying power of more than 27%. The rate your payments are based on is meaningless in determining your maximum qualified amount. It could be 1% or 4% and you would still qualify for the same amount.
Example 3 – Using the new stress test rate of 5.25%
Under the new stress test taking effect on June 1st, 2021, your maximum purchase price drops to $770,000, less your 20% down payment for a maximum mortgage amount of $616,000. This represents a decrease in buying power of roughly 5.2%.
Who Is Affected By The New Stress Test?
The impact of the new stress test will be quite minimal for most people, as few are pushing their qualification amount to the max. Many first-time homebuyers are however. Home prices are at their highest levels, and qualification is not getting any easier. I really don’t understand why they are trying to make things harder for first-time homebuyers especially. They should be trying to encourage new home ownership, not discourage it. If you ask me, first-time homebuyers should be exempt from the new rule. However, they don’t consult me before making these decisions, as much as I think they should.
What You Need To Do
If you are currently shopping for a new home and you have an active preapproval or prequalification in place, then you’ll want to reduce your maximum qualified amount by roughly 5.2%. Note that the actual amount qualified can vary depending on property taxes and condo fees (if applicable), so the 5.2% is not a hard and fast rule. I would recommend contacting us to find out how much impact the stress test will have on you personally, and let us present you with your options.
Is There a Way To Protect Yourself Against The New Stress Test?
When the OFS made their original proposal, they had stated that having a preapproval in place prior to June 1st would be enough to get you around the new stress test, even if you purchased after June 1st. However, this added protection was left out of their official announcement. The only way to qualify based on the current stress test rate of 4.79% is to have your offer accepted prior to the cut off date of June 1st. It doesn’t matter if the closing date is after June 1st. If your offer is accepted before this date, then you will still qualify based on the previous stress test rules.
A Word Of Caution – Some lenders may jump the gun and implement the new rules a bit early. The date is June 1st, but I would not be surprised if some mortgage lenders implemented the new rule early. This is common when new mortgage rules are announced. It’s possible that there may be fewer options if you cut it too close, which means that you might not qualify for the lowest mortgage rate available.
Why Is The Stress Test Increasing?
This is our government’s attempt to cool the red hot housing market. Really, its smoke and mirrors as I don’t believe it will do anything to cool it. The vast majority of homebuyers are not pushing their maximum qualified limits. There is room. The housing market will eventually correct, and it will not need government intervention to make it happen. This change is the government’s way making it appear that they are doing something to bring the housing market under control. But in reality, the impact will be minimal, if anything at all.
Can You Get Around The Stress Test?
If you have a down payment of at least 20%, then yes, this is possible, but options are quite limited. Local credit unions can still qualify you based on the contract rate… that is, the rate your payments are based on. The rate can be quite a bit higher however. There are also some lenders that can make exceptions that will allow you to go over the maximum allowable debt to income ratio, providing that your application is strong. If you’re looking to qualify for a higher amount, then reach out to us and we can assess your situation and let you know what your options are.
Your Kids Can Help!
Do you have kids? Most lenders are now considering your child tax credit. (CTC), providing that your kids are under a certain age at the time of your application. Will you still be receiving the CTC by the end of your mortgage term? If yes, then it can be generally used to boost your qualifying power. Maybe an incentive to start having more kids?
The new stress test will reduce your buying power by about 5.2%, which will have its biggest impact on first-time homebuyers. For the vast majority of mortgage seekers, the new stress test will not have any noticeable impact.