Three Ways To Beat The Mortgage Stress Test

It now seems inevitable that five year fixed mortgage rates will surpass 4% by this time next week.

And the increases are showing no sign of slowing down. The pace of change is lightning fast in recent weeks!

The five year rate has more than doubled since last September! Not that long ago, we brokered some mortgages at 1.59% in early 2021.

These new higher rates mean the mortgage stress test is already under siege. Instead of qualifying at your actual mortgage rate, you are going to be tested at 2% higher than this. Perhaps at 6%!

Why do rising mortgage rates affect housing affordability?

This is going to create a housing affordability problem for two reasons:

1) The monthly payments on a 4% mortgage are significantly higher than they would be at 2%. People can only afford so much money to put towards their monthly mortgage payment.

2) When determining how much borrowing power you have, the good old mortgage stress test kicks in.

That means your qualification is determined by caculating your debt service ratios at 2% higher than the actual mortgage contract rate, or the government Mortgage Qualifying Rate of 5.25%, whichever is greater.

So that means the stress test rate is going to be at 6% (not 5.25%) when your fixed rate mortgage offer is at 4%.

How can you beat the mortgage stress test?

1) Credit Unions – qualify you at contract rate or contract rate plus 1%

Credit Unions are provincially regulated and are able to offer creative financing alternatives. The ability to qualify at the contract rate can increase your borrowing power in a majorly big way.

2) B-lenders – qualify you with expanded debt service ratios – as much as 50%/50% and even more if your loan to value ratio is less than 65%.

You have access to much more money if you are being assessed at a rate of 50/50 versus the norm of 39/44.

3) Variable Rate Mortgages – the stress test for these remains 5.25%

Variable rates are still very low – that will change, as we are expecting several prime rate increases in the months ahead. But for now, they are qualifying at 5.25%.

If you go this route and you really cannot stand the idea of being in a variable rate mortgage then you can always ask your lender your options to convert to a fixed rate mortgage once the VRM is funded. It will be a seamless switch at that time.

This topic is discussed more here.