Buying a home in Canada is a long process, and with a competitive mortgage market, it has changed a lot due to the mortgage stress test. If you’re planning to buy a house in Ontario, you should get familiar with the mortgage stress test because it’ll help you break down the costs of your mortgage payments. Let’s take a closer look at what a mortgage stress test is, how it works, and how to prepare for it.
What is a mortgage stress test?
A mortgage stress test is used to determine how much you can afford for your mortgage. The test factors in how much you put down for your mortgage against the current interest rates on the mortgage market. It is also used to predict if you can still make your mortgage payments in case you lose your job.
How does a mortgage stress test work?
When you apply for a mortgage, the bank needs to check that you’ll be able pay your mortgage payments. The bank uses the mortgage stress test to calculate your mortgage using a higher interest rate than you’re being offered to determine a worst-case scenario. Think of a mortgage stress test as a predictor of future payments for you as the borrower. Also, the bank uses it as a simulated predictor to test whether or not you would be able to make your mortgage payments based on that high interest rate.
A Mortgage Stress Test Example
The best way to understand how a mortgage stress test works is by using an example. Let’s say that you and your spouse want to buy a house. Your spouse’s total annual income is $100,000. The best mortgage rate in Ontario is 2.49% and your bank gives you a rate of 4.79%.
Based on our mortgage qualification calculator in Ontario, factor your spouse’s $100,000 income, and a 10% down payment on a 5-year fixed mortgage rate of 2.49% amortized over 25 years. Based on those figures, you and your spouse could get a mortgage for a house priced at $537,868 with a 4.79% qualifying rate.
How to Financially Prepare for the Mortgage Stress Test
There’s a famous saying, “A winning effort begins with preparation”, which was coined by professional football coach Joe Gibbs. When it comes to applying for a mortgage, preparation is key to getting the best rate. The best thing you can do to prepare for applying for a mortgage is to pay all of your debts until it reaches a zero balance. Now is the time to focus on paying off those high-interest credit cards, any outstanding debts you owe to collection agencies, and even those store credit cards that you use for online purchases. Trim those down below the 30% credit utilization rule.
If you would like to know more information on how to use a mortgage qualification calculator in Ontario, we would love to help you out. Please schedule a free consultation with one of our Northwood Mortgage™ brokers in Toronto by calling 416-969-8130 or toll-free at 888-492-3690 or contact us here.