Stress Test Your Mortgage



Mortgage What Can You Afford - Words on CalculatorThree in ten first-time buyers expect rates to stay the same over the next five years, according to a BMO poll. But what if they don’t?

Peace of mind comes from knowing you can handle higher payments. When rates rise materially from today’s levels, you don’t want to be among the 1 in 5 mortgagors who potentially face payment shock.

But minimizing that risk takes forethought. So to make planning easier we’ve created a simple tool that stress tests your mortgage.

Give it a whirl and tell us what you think Mortgage Stress Test Calculator (beta)

This calculator shows your potential future payments based on an estimated interest rate and your mortgage balance at renewal.

canadian dollar houseThe mortgage industry’s rule of thumb is that total housing costs (mortgage payments, heating costs, condo fees, property taxes, etc.) should not consume more than one-third (32%) of your gross income.

Unless you have sufficient resources, going above this threshold can strain, or even break, your budget. That’s especially true if you have other big monthly payments.

7 Tips for minimizing payment shock:

Apart from the obvious (buying a cheaper house, putting more down or earning more), you can:

  1. Lock into a longer term fixed rate—like 5- or 10-year fixed
  2. Inflate your mortgage payments relatively painlessly
  3. Pay down other debt to free up cash for your mortgage
  4. Invest the equivalent of 10-20% of your mortgage payment in a TFSA that you can tap if needed
  5. Choose the longest possible amortization (e.g.  30 or 35 years) and then set your payments to match a 25-year amortization (If your payment increases and cash gets tight, you can lower your payment to the original amount. This strategy is geared to someone with a floating payment.)
  6. Get an adjustable rate mortgage with a fixed payment. (Like #5 above, this protects you only during your term, not after maturity. Payments reset at maturity. Moreover, if rates rise too much—i.e., above a certain trigger rate—most adjustable rate lenders reserve the right to increase your payments.)
  7. Utilize a skip-a-payment option—if offered by your lender. (This should generally be a last resort because it increases your interest costs and lengthens your amortization.)

If you have to make use of options #5 and/or #7, your mortgage payment may have been too high to begin with.


Sidebar: Three-quarters (76%) of Canadians say they plan to stress test their mortgage, according to BMO.


Rob McLister, CMT

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Comments

  1. Comment avatar

    TD Girl    

    Great tool Rob. I’m curious, how many lenders currently have 35 year amortizations?

     
  2. Comment avatar

    WFM    

    Equitable Trust,MonCana,RMG,Van City & Envision show as offering 35 year amortizations.

     
  3. Comment avatar

    Eric Putnam    

    No one has a crystal ball to predict when and by how much rates may rise. Great job Rob with the article and calculator. Very useful and will be sure to share.

     
  4. Comment avatar

    just 1 opinion    

    Practically speaking I think a 2% rate increase is probably the right number for a stress test. The economy is so leveraged to rates. An increase over 2% would be a huge drag on growth and kill too many jobs.

     
  5. Comment avatar

    JJ    

    Awesome article (as always) and great tips. I love the TSFA idea and think that everyone should max out their payment combined with an accelerated bi-weekly payment. By not being over-leveraged in the first place, they should have no issues doing this.
    Cheers!

     
  6. Comment avatar

    Kiping    

    Are you sure MonCana still has 35Y ams? Its rate sheet shows 30 years.

     
  7. Comment avatar

    Canadian    

    BoC rate I think is going nowhere far for the next few years

     
  8. Comment avatar

    WFM    

    Mortgage Mentor is showing 35 years, however, MonCana’s website is showing 30 years.

     
  9. Comment avatar

    Joe Tomkins    

    Fantastic tool Rob,
    We, that is those who are a part of 180 mortgage professional academy, have been promoting the awareness of the need for a mortgage “stress test” or “inflation hedge” for years too.
    All mortgage brokers need to be aware of the history of interest rates and where they can and very well may go over the next 5 – 10 years. Quite frankly if we are not preparing our clients for higher rates down the road with the Inflation hedge strategy or your stress test then we are not doing our jobs as mortgage professionals. This is what differentiates us from the drive through rate hubs that are continually popping up taking orders.
    We cannot just be order takers!

     
  10. Comment avatar

    Robert McLister    

    Thanks TD Girl, Eric, JJ and Joe!

     
  11. Comment avatar

    crystal.mackenzie@scotiabank.com    

    Another option is to ladder the mortgage terms. With Scotiabank you can have up to 3 mortgage terms, all coming due at different times, so you aren’t “betting the farm” on one point in time being a good time to renew.

     
  12. Comment avatar

    Robert McLister    

    Hi Crystal,
    Thanks for the note. By having three maturities, there are two more times that one has to rely on their lender to provide the best rates. Will the lender offer its very best deal on each renewal, knowing that person must pay a penalty to leave?
    Cheers…

     
  13. Comment avatar

    Jungle    

    Rob I really like this calculator and all the suggestion on what you can do if rates rise, good job you did here.
    I will be playing with it to see different circumstances for myself.

     

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