3 Practical Tips to Help You Pass the Mortgage Stress Test
It just got a little tougher for Canadians to get approved for mortgages. As you may know, new rules introduced the beginning of 2018 introduced a stress test – the goal of which is to make sure that homeowners are able to make their mortgage payments even if interest rates go up. But how do you know whether you will pass the stress test and what you can afford under the new rules?
Fear not, we’re about to give you 3 practical tips to help you determine just that.
1. Imagine how a monthly mortgage payment increase would affect you.
Currently, Canadians who are able to make a down payment of 20% or more, will have to pay roughly $500 per month for every $100,000 that they owe on their mortgage. If you want to see how your household would fare in the stress test, imagine that the number jumped up to $600 per $100,000. Would you still be comfortable making the payments?
2. Determine your gross debt service ratio.
While the financial stress test is important, it is not the only criteria that lenders will look at. Another important factor is your gross debt service ratio (GDS). This is the percentage of your income (before taxes) that is used to pay for your housing expenses. It is calculated using either 100% of your property taxes or 50% of your condo fees plus your heating expenses. Most lenders will approve your loan when your GDS is no more than 32% of your income.
3. Determine your total debt service ratio.
Finally, lenders are going to want to know about any additional debt that you are carrying, which is why they will also look at your total debt service ratio (TDS). Your TDS includes not only your mortgage payments but all other debt payments including car, credit cards, line of credits etc. Your TDS should be less than 42% of your gross monthly income.
What can you do if you don’t meet the criteria?
Not meeting the new criteria isn’t the end of the world. It may simply mean that you will have to buy a less expensive home, or perhaps pay off some debt before applying for a mortgage. Whether you believe that you can meet the stress test or not, it is always a good idea to get expert advice – and that is what the team at Matrix Mortgage Global will provide.
We will work with you to help you navigate all of Canada’s mortgage criteria and help you find the solution that works best for you and your family. Call us today at 1-800-429-0717.