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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