The size of mortgage loans consumers can be eligible for in 2022 has began to vary due to the new updates made to the stress test rules.
Since the majority of 5-year fixed mortgage rates are currently over 5%, their stress test would be 2% or higher at 7% or higher. The mortgage stress test rate for variable mortgages is currently at 5.25%, which is still quite low.
Many consumers opt for a variable-rate mortgage even though their personal preference is for a fixed-rate mortgage in order to maximize the amount homeowners can qualify for.
However, if you are a borrower who prefers fixed-rate mortgages then there are thankfully a few loopholes that can help you to reduce the impact of, or even avoid the mortgage stress test.
Buying a Home
Bank Lending Exceptions
Because it is not constrained by CMHC insurance restrictions, the bank can be more accommodating with your application if you have 20% or more down payment. More specifically, the banks might make an exception to give you more money than usual if you have strong prospects for rising income, excellent credit, and some savings or investments left over after the purchase.
Freedom Capital has a lot of expertise drafting requests for banks to raise their loan limits and grant exceptions, as needed by the borrower.
Credit Union Approval
Interestingly, the stress test does not apply to many of the mortgages held by credit unions because they are not federally regulated. Because a mortgage with less than 20% down payment would be a CMHC-insured or “high ratio” mortgage, the stress test will always be applicable. However, the credit union can qualify you at their contract rate and even at a 30-year amortization provided 20% of the purchase price is available as a down payment. A significantly higher pre-approval may be the outcome.
Vancouver Mortgage brokers, Freedom Capital can find you the best approval on a NO-stress test mortgage because we work with many different credit unions.
What’s the catch, though? The rate may be slightly higher because there aren’t a lot of extra funds accessible for these kinds of mortgages. The rate is typically 0.50 percent higher. The additional interest charges of several thousand dollars may not be worthwhile for certain borrowers.
However, for many, it may be worthwhile if it lets them get into the home of their dreams and the payments are manageable. In fact, relative to other asset classes, home values are rising at a 10% annual pace; therefore, depending on the state of the market, the impact of a little higher mortgage rate may be minimal or even justifiable.
30 Year Amortization
You can cut your payments and get more mortgage approval by choosing a longer 30-year amortization. You can still get approval for a 30-year amortization even if you want to pay off your mortgage sooner, such as in 25 years, 20 years, or even 10 years. Then, you can raise your payments by using pre-payments made after closing to shorten the effective amortization.
Your approved amount could rise by 15% as a result of this action, greatly offsetting the negative effects of the stress test. Please be aware, though, that the 30-year amortization is only offered for down payments of 20% or more.
Gifted Down Payment
A down payment can be gifted if there are parents, grandparents, or other close relatives involved. By making a larger down payment, you’ll be able to purchase a larger property while carrying a smaller mortgage. Additionally, as mentioned above, if you can put down up to 20% of the purchase price, you can prolong the amortization period to 30 years or negotiate with a reputable credit union to significantly increase affordability.
However, even a small increase of 5% to 10% in the down payment, in the form of a gift, can significantly alter the range of the pre-approval. The regulations are now somewhat loose as long as the down payment comes from a member of the close family.
Perhaps a co-borrower can be added to a mortgage in place of a present or in addition to a gift to help increase affordability and lessen the impact of the stress test. Once more, the co-borrower should be a member of the immediate family and in a reasonably secure financial situation with little to no debt of their own and a reliable, full-time salary. The sky is the limit in terms of a pre-approval, and it would depend on how strong the co-borrower is.
Renewing a Mortgage
Make sure you or your Ontario mortgage broker are taking the following into consideration while renewing a mortgage if you become stuck due to the stress test rate.