The Bank of Canada has been repeatedly increasing the interest rate in an attempt to bring down inflation. You may be wondering how this affects the mortgage you have or the mortgage you want.
Guest contributor: Emmanuela Urbani, Licensed Mortgage Agent
Understanding the stress test and how it is being affected by rising rates
When you qualify for a mortgage, your approval is subject to whether you pass “the stress test”. The stress test is there to account for potential changes in your spending and income and attempt to protect you from no longer being able to afford your mortgage payments. This summer, the parameters for the mortgage qualification stress test were increased, and this reduced borrowing power by approximately 20%. While there is no mention of changing the stress test at this time, it is still being affected by rising interest rates. The current Prime rate is 5.45% and the stress test rate is 5.25%. However, in order to qualify you for a mortgage, I must use either the stress test rate or the current variable or fixed mortgage rate plus 2%. For instance, if your financial institution is offering a variable rate of 5.15% and a fixed rate of 5.34%, for example, you must qualify for your mortgage at an interest rate of 7.15 or 7.34% respectively. This significantly reduces the maximum amount of mortgage money you qualify for.
How does this affect your ability to pull equity?
With the downward trend in real estate, your ability to pull equity from your home is affected in two ways. Firstly, your house is likely valued lower due to the current real estate market. Secondly, you must now qualify at the interest you are being offered plus two percent for your typical mortgage product. If you need to pull equity from your home, now more than ever, it is important to speak to a Mortgage Agent such as myself. My consultation is always free, and you are not obliged to do your mortgage with me. As mortgage agents, we have access to alternative solutions that can make a big difference in your ability to take money out of your home. Due to the tightening rates, it is becoming far more common to no longer be able to qualify for a conventional mortgage product. Reach out if you need to access your equity, and we can investigate your situation for all possible solutions.
Are you in a variable rate mortgage with or without fixed payments?
If you are in a variable rate mortgage or a variable mortgage with fixed payments and your mortgage is coming up for renewal in a year or two, the rising rates will also affect you. Let us consider a fixed payment variable product. Your payment will likely start to change if it has not already, due to the large increase in the Bank of Canada rate. With this type of product, your amortization (the length of time it will take you to pay off your mortgage) is typically automatically extended. It is an excellent idea to find out what your current amortization is so we can ensure you will be in a more favorable position when your term is up for renewal. If you are in a variable rate mortgage and your payments are creeping upwards, this is the time to discuss whether a fixed mortgage is a good option for you.
If you need to increase your cashflow, it is an excellent time to consider home-sharing and/or renting if you are able. When you home-share you essentially rent a room in your primary residence, and receive passive income without the legal risks of a landlord. Contact the team at HomeShare Alliance to determine if home-sharing is right for your situation.
What if you are not sure what kind of mortgage you have?
As already mentioned, my consultation is always free, and you are not obliged to do your mortgage with me. Please do not hesitate to reach out to me, and I will help you understand your current situation and what you can do to put yourself in the best possible position moving forward.