As a Mortgage Expert, I have historically built “Mortgage Plans” around every client’s “personal stress-test“, rather than by how an institution simply wants to lend our clients. How much the institution will lend a borrower may not always be a reflection of what my client’s budget can truly manage.
I feel it is very important to understand a borrowers personal financial ambition, expectations, obligations, and future goals first, before determining the appropriate budget or cash flow that resonates with them and their families.
As of January 1, 2018, the federal mortgage regulators are chiming in and are setting a new minimum qualifying interest rate for uninsured mortgages. This effectively means that any mortgage at 80% of the properties value or less, will now be subject to a new stress test. This new federal requirement is a personal budget hedge in the event that mortgage rates were to rise by about 2% in the next 3-5 years, which I personally feel is highly unlikely. If they did increase that dramatically, we would have much larger economic challenges to deal with, compared to simply making monthly mortgage payments.
Despite the fact that you may have 20% down payment or are refinancing to 80% loan to value or less, lenders will now have to calculate your mortgage payment as if your interest rate was at approximately 5%-6%, (even though today’s actual 5 year fixed mortgage rate can be as low as 2.99% on qualified, insurable purchases). Similar rules were already introduced in October 2016 for all buyers who did not have 20% downpayment. Simply put, this now means that there are no longer any mortgage underwriting advantages for buyers with a 20% down payment.
Now, moving forward, when applying for a mortgage, assets or cash wealth/equity really mean nothing. One must clearly demonstrate they can manage all of their monthly obligations should interest rates rise by about 2%, regardless of how large their down payment or equity position may be.
I have estimated that in the GTA these new rules will affect 1-in-6 homebuyers.
For example, let’s look at a household with an annual income of $150,000 combined, annual property taxes of $5000, a heating cost of $100 monthly, amortized over 30 years with $0 unsecured debt and using a 5 year fixed rate of 3.59% for a refinance.
On November 5, 2017 that household can qualify for a maximum mortgage of $769,638.42.
As of January 1, 2018 that household can qualify for a maximum mortgage of $611,732.79.
Essentially, a haircut of $157,914.63 or a decrease of 20.51%.
Again, as your personal Mortgage Expert, my top priority is that my borrowers are 100% comfortable with their own “personal stress test” despite any federal mortgage rule changes.
Please remember that a mortgage lender is the supplier of funds, and not necessarily a neutral advisor. In general, they want to lend out as much money as possible rather than to address your “personal stress test“.
Plase feel free to reach out to me anytime to learn more about how to design the right mortgage plan for your own personal financial tolerance.
Brad Lockey, Mortgage Expert