Anyone following the mortgage market is aware that fixed mortgage rates have been increasing since early October. While they have stabilized for now, it’s possible that we could see further increases in coming months.
As mortgage payments will increase with rates, this will also reduce your maximum qualified mortgage amount, right?
Logically, this makes sense, but a higher mortgage payment doesn’t necessarily mean that you’ll qualify for a lower amount.
That’s because your qualification is not based on your mortgage payments.
It’s based on the mortgage stress test.
What Is The Mortgage Stress Test?
The stress test is another way of saying qualifying rate. It means that you have to qualify as if your payments were based on a higher rate. While there are variable rates as low as 0.90%* for some situations, you have to qualify as if your payments were at the current stress test rate of 5.25%.
While the stress test was first introduced in 2011 for shorter term and variable rate mortgages, the term wasn’t commonly used until December 30th, 2016, which was when all mortgages had to pass the test. The stress test has been a big part of mortgage qualification ever since.
If fixed mortgage rates continue to rise, payments on new mortgages will also rise accordingly. However, your maximum qualified mortgage amount will remain unchanged as long as there are no changes to the stress test rate.
How Will Higher Mortgage Rates Affect Your Qualification
While most lenders have increased their fixed mortgage rates by roughly 0.60% since the beginning of October, the stress test rate remains at 5.25%, which means that the higher rate does not have any impact on your maximum qualified amount. At time of writing, there is no hint of an increase to the stress test rate. It’s possible that this could change, but I would not expect any significant movements. It’s already hard enough to qualify for mortgages given current real estate prices. Increasing the stress test by any significant amount would be a bad idea. If fixed mortgage rates were to continue to rise, I would expect the stress test rate to increase at a much slower pace. This gives the government some control over affordability.
Why The Mortgage Stress Test Is Important
You’ll hear many people talk negatively about the stress test, but it serves an important purpose. It’s not there to be a thorn in our sides. It’s there to protect us against rising rates. As you’re already qualified to carry your mortgage as if payments are based on 5.25%, then you should be able afford your payments if rates were to climb up to this level. At least, on paper. If everybody could qualify based on today’s lowest variable rate of 0.90%*, then many people would be facing an affordability crisis, which could then lead to a housing crash. Fortunately, the stress test is there to ensure that everyone qualifying for a mortgage today will still be able to afford the payment at renewal should mortgage rates continue to rise.
*The lowest mortgage rates are available for insured mortgages, or for those with 35% or greater down payment or equity. Original purchase price must be under $1 million, OR home must have been purchased prior to November 30, 2016. (some exceptions apply).
