What is the “STRESS TEST”?
The mortgage stress test has nothing to do with your doctor. Tisha Findlay explains the qualifying rate, why it reduces your borrowing power, and who it applies to.
The term "stress test" has generated a great deal of discussion. I have had numerous conversations with clients, family and friends who interpret it in different ways. One being that the only way to qualify for a mortgage is to literally go to your doctor for a check-up. Perhaps the doctor will determine that you are stressed, however this has nothing to do with your mortgage approval. Based on many of my chats, I can understand how this may have been misunderstood.
The qualifying rate
In fact, the real meaning of the "stress test" is to examine your financial ability to pay your mortgage should interest rates rise. This means that a higher rate is used to determine affordability when applying for a mortgage. It is called the qualifying rate, and it is typically 2% more than what you will actually pay. For example, if you have been approved for a mortgage with a 5-year rate at 3.39%, the qualifying rate is 5.39%. Your mortgage contract and your payments will be based on the lower rate of 3.39%. The qualifying rate just means that you can afford payments based on 5.39%, which better positions you when it comes to re-negotiating your mortgage.
The good and the bad
As with all things in life, there are good and bad points to this rule. The good is that you are more likely to afford your new mortgage payment in the event of a substantial interest rate increase, as mentioned above. The bad is that it reduces your overall borrowing power. This means there could be a significant difference in your pre-approval amount when looking to buy a home.
When this article was written in March 2018, the rules had recently been extended so that the "stress test" applied to all borrowers regardless of the down payment or equity they had accumulated. Although the rules make lending a little trickier, there are many options available that offer borrowers the solutions they are looking for.
Originally published Mar 17, 2018. Rates, programs and rules mentioned reflect that time; for today's numbers see the rates page or ask Tisha.
