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Mortgage stress test explained: How much can you afford when buying a home? - YouTube
Channel: Homebuyer's School
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In this video we explain the mortgage
stress test how to pass it and if the
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recent interest rate hikes have actually
made an impact that's starting right now.
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Welcome to Homebuyer's School brought
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to you by Brookfield Residential.
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Hi everyone welcome to another
Homebuyer's School video, a channel
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where you get the latest strategies tactics
and tips from home buying experts, and
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remember if this is your first time on
this channel and you want to get the
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latest strategies from the experts, hit
the subscription button below hit the
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little notification belt so you don't
miss anything now I'm joined today-- I'm
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joined by Mujtaba Syed, manager mobile
mortgage specialist with TD Canada Trust
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and today we're gonna explain a little
bit further on what exactly is the
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mortgage stress test.
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Yeah so the mortgage stress test is
technically what we look
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at what the bank accountant has come
back to the banks to look at extreme
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what-if scenarios to see what happens if
at a certain time mortgage rates have
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gone a lot higher than at the time
clients have qualified to see if they
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can still afford to pay their mortgage
so for example if someone actually
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qualified for a mortgage and the
interest rates let's say 2.59 a couple
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years ago, they have a time of renewal
now interest rates are down to 5.34
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or 6% whatever
is available and they have no choice but
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to renew what those rates-- what the
payments are going to look, like can they
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really afford those payments? Keep in
mind we did have historically local
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mortgage payments for the longest time
and water people were just on the brink
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of qualifying for their houses at that
time at those rates but those rates are
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not going to be available for too long
they might not even be available when
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you come off renewal so the Bank
encounter and the banks also want to see
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that at the time of renewal are you
going to be able to afford that mortgage
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today five years from today, six years
from today, and ten years from today. So
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they actually put that stress testing as
a what-if scenario to see sure the rates
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are not a certain amount today but they
could be in the future.
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Is it guaranteed? No, but there's a
possibility and they want to see that if
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you can afford the payments then
you shouldn't be having any issues to
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get qualified today and that you can
afford to make your payment's up any
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given time. So that's technically in a
nutshell what is a mortgage.
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So I know there's a difference between
putting more than 20% down and less than
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20% down right, so I-- we do have a video
on the mortgage stress that's actually
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explained in the video above but
remember when we talked about it last
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time, if it's above 20%
you don't need mortgage insurance right
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but you still need to do the stress test.
If you have less than 20% you
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need mortgage insurance but you still
need to do a stress test. Right now is
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the stress test different for either, or
is it the same stress test?
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So the stress test
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when you're first started off, the stress test
was just for in short mortgages so
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that means they put in less than 20%
down-- you have to deal with the stress test
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scenario, and then as of last year they
actually made that across the board for
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everyone, whether you're putting 20% down
or less than 20% down, everyone needs to
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kind of qualify and in a way it's an
inconvenience for sure but it's better
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overall for our housing industry
and for the economy so we feel like
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everyone can afford their payments and
then you're absolutely right Karl, the--
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stress test definitely
does differ if you're putting less than
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20% down, it's a very simple calculation,
it's a simple formula to look at the
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bank account as a 5 year posted rate
and then qualify you on that, no question
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is asked, now if you're putting more than
20% down it they can take a look into a
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lot of different scenarios they can take
a look and see what your term is, what
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term are you getting and then they can
charge you a 2% premium on top of that
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or the 5 year posted bank account or
rate whichever is going to be greater so
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you definitely want to have the
conversation with your lender to see
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does it make sense for me go with a 5
year fixed if the 5 year fixed today
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is 3.6, 3.7 that's gonna make my
qualifying stress test at 5.7 which is a
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lot higher than the bank account is, 5
year posted rate or 5.34 or if you
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decide to go with something like a home
equity line of credit.
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They could take a look at to see
whatever your pricing is and charge you
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a higher 2% premium on that. Once again a
great discussion to have with your
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lender and your specialist to see what
is best for you and also kind of going
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to terms to see what's the best rate in
term for your financial picture or your
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monthly budgeting.
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So if you had a choice right now,
let's say as a
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homeowner or potential home buyer I'm
deciding between putting down 20% or
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more or less than 20% getting an insured
mortgage, is there advice on whichever
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one or is it sort of really focused on
your lifestyle and more personal?
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Yeah 100%,
it's a hundred percent based on your
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personal preference and your lifestyle
and your budgeting to see what's
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available right, it's obviously the more
you put down just less interest costs,
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you don't have to come up with CMAC or
defaults insurance premiums which could
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be a lot and then their factory right
into your mortgage means that now
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they're going to be-- you're gonna be
paying interest on that and sometimes is
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going to be compounding interest where
you take a look at the fact that is now,
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I don't have the 20% but now I might
need to save up longer, or I need to
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have my family
help me, or ask them for help or
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borrow to do a certain amount-- well then
you have to see if that's really worth
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it for you, maybe buying a house today
and getting a cheaper price locking a
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price today instead of waiting a few
years to save up to extra 20% you might
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miss out on the market, you might miss
out on any appreciation your house can
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do in that time so it's a very
personal preference but it's a great
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discussion to have with your lender and
and if you can explain to them your
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concerns and your scenario and they can
advise you on best-- what's best to do.
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Maybe sometimes it's not best to wait a
couple years to save up that 20% and we
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can-- maybe the appreciation in that time
will be a lot more, maybe three years
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from today you can get a lot cheaper
house and that same house now it's
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costing you a lot more and you've not
having really done yourself any benefit
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by saving up to get that extra 20%. So
once again really have that discussion
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go with your personal preference, find
out the pros and cons for both, learn
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about the products and then decide if
what makes sense for you.
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Now let's say
you're on a fixed or a variable mortgage
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rate, does this stress test have any
impact on you?
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Once again, so it just
really-- just depends if you're insured
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product or not if you put in less than
20% it doesn't matter at all if you're
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going with a fix or a variable, everyone
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will qualify at the 5 year Bank of Canada
posted rate. Now if we're putting
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more than 20%-- 100% it will impact you if
you're going with a fixed-rate, they're
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going to charge you that 2% premium
whatever your fixed rate is so if your
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fixed rate is 3.6, 3.7 there's gonna be a
2% premium on that which is gonna be
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flat 0.7, or if it's less, let's say
it's 2.5 for a five-year posted rate, so
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they'll charge-- they can charge you 2%
will be 4.5 but then at that time
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they will look at to see what the 5 year
bank account as posted radius so they
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look at the benchmark at 5.3, 4
and whatever is greater than
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that so if your 5 year posted rate is
greater than the benchmark, that is what--
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is your stress test, but if your 5
year posted rate is lower then the bank
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of Canada posted rate then you qualify at
the bank of Canada posted rate. And for
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variable-- even for a conventional mortgage
which is when you put more than 20%
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down, you always qualify at the 5-year
posted rate and that's just because it's a
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variable, we just have no idea right, they
fluctuate, they can go up and down so for
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us to use a stability stress test we
will just use the bank account as 5 year
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posted rate.
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What income do you need to actually pass the stress test-- or is there
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like an income level?
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Really just depends, you probably--
you can go online and you
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could see some grass-- what I like to do
and explain to my clients and say the
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best thing to do is probably just come
in and have that discussion, start a
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process for pre-approval to see exactly
where you can qualify, a lot of guesswork
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that goes into it, there is some credit
requirements that we take a look at for
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example, if your beacon score is at a
certain number, affects our ratios if
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you're above 680 the bank of Canada where
the banks can actually go to a maximum
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44% of your ratios but if your
credits not the best-- it's lower than 680,
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that ratio automatically now drops to 42%
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and there's some other ratios we take a
look at so you can find these
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calculators online, you can find these
graphs online but it's not going to be a
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good indicator of to see how much you
can qualify with the new stress test, the
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stress test has really definitely
impacted qualifying as a whole, the best
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thing to do is go in and talk to a
specialist, talk to someone who's a
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professional and who's been-- who can
advise you on what to do,
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and really get a proper number done.
Don't look online and then write an
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offer on a house, the worst thing we
would want you to do as you fall in love
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with the house you write an offer and
then you realize after that you don't
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qualify for that because you may not
have the credit requirements or
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maybe
some information you read online was not
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accurate enough so definitely go in see
a professional skier lenders see a
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specialist and do a proper pre-approval
process so you can actually when you go
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shopping, which should be the most
funnest part of the house-hunting
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experience is you can go in there with
confidence knowing that I know I'm
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approved for a certain amount and I can
get the house.
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Is there any way to avoid
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the stress test or that's your kind of--
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Unfortunately not, there is no way to
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avoid the stress test at all.
Every Canadian who's looking at
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purchasing a house has to go through the
stress test so the sooner we can
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recognize that and learn the benefits of
stress test-- stress test is an
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inconvenience but overall I think it is
a benefit for for the banks to have and
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for us to have so we don't see a major
financial crisis or a crash that we've
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seen happen in other countries and very
similar to happening with what happens
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with mortgages when people can't pay. So
sooner we get to realize that stress
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test is not going anywhere, it's going to
be around, the best thing to find out
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is see how much can I qualify now with the
stress test and then kind of see maybe
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we drop down our purchasing price a
little bit and see if we can qualify for
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whatever is comfortable for us. At the
end of the day we still have to end up
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making that payment and a home ownership
experience is a long-term experience
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right, it's not you jump into your first
home and that's gonna be your forever
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home forever, maybe you start off with
something like a starter home and then
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you work your way up to see once your
financial situation gets better,
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and a stress test can really help us
kind of realize that and get to what our
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dream home could be in the future.
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Now finally the last question
I have for you is,
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has the recent interest rate hikes
impacted the stress test at all?
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Yes they have so if once again, if you're--
if it's the conventional product, if
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you're putting over 20%, you've gone
with a-- you decided to go with a five year
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fixed rate, if the rates go up like I
said, there's gonna be that 2% premium on
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top of your five year fixed rate so that
would actually raise your stress test
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as well meaning it would actually change
your qualifications and you would have
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to qualify at a higher rate and that
means you might qualify for a little
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less. Once again, speak with your
specialist, your lender and see exactly
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where you stand,
even after the rates have gone up.
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So my question for you is,
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has the recent mortgage stress test impacted your ability to buy a home?
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Let us know in the
comment section below.
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So Mo, you have anything else to add?
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No I think that's great.
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Definitely reach out to your bank--
go speak to your lender or your
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specialist and and have that proper pre-
approval done so when you go
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shopping around you can shop around with
confidence.
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And remember to watch our
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mortgage related videos in the playlist
in the description below. Thank you very
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much for joining us and we'll catch you
next time.
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That's another edition of
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Homebuyer's School. Tune in next time for
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more expert tips and tricks and visit
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homebuyersschool.ca to bring you one
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step closer to finding your dream home.
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let us know if you have any home buying
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