Can your Vancouver Mortgage Withstand a Stress Test?
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Can your Vancouver Mortgage Withstand a Stress Test?
From a recent survey performed by the Bank of Montreal, three out of ten first-time home buyers believe that mortgage rates will remain the sane over the following five years. It would great if they did but what happens if it doesn’t turn out that way?
Making your mortgage payment can be a lot less stressful if you are certain that you can financially manage a higher payment. Should rates rise however, it also certain that as many as 20 percent of all mortgage borrowers could face some payment stress.
Lowering that risk of being stressed financially may require some pre-panning and there are calculators available that will help you determine whether you will be financially stressed if rates rise. You can find these calculators simply by entering “Mortgage Stress Test Calculator” to find out how you fare.
These calculators have been designed to illustrate what you might be paying in the future using interest rates which have been estimated based on the balance of your mortgage should it have to be renewed.
The basic rule of thumb used by mortgage lenders is that you should not be using more than 32 percent of your gross income to cover your mortgage payment plus what you will be paying for property taxes, home heating costs, condominium fees and other related costs.
If you do not have adequate financial resources that go above and beyond this 32% ceiling then you could find your monthly budget severely stressed or even shattered as a consequence. This is particularly something to consider if you are also saddled with other large monthly payments that you have to maintain.
Tips of How to Reduce Mortgage Payment Stress
- You can buy a cheaper house so you manage future rate increases more easily.
- You can increase the amount of the down payment you put down on your home.
- Choose to lock your mortgage into a fixed rate which is longer such as a 5 year or a 10 year term fixed rate.
- Make extra mortgage payments to reduce the principal.
- Reduce your other current debts so you will have extra cash on hand should rates rise.
- Invest a certain percentage of your available income into a TFSA (Tax Free Savings Account) which you can access as needed should rates rise down the road.
- If you can afford a 25 year amortization, you could extend the amortization to 30 or 35 years and set the payments as a floating payment to match a 25 year amortization which allows you to lower payments if rates rise.
- Choose an adjustable rate mortgage which has a fixed payment which affords you some financial protection during the term itself (but not when the term matures).
- Some, but not all lenders also offer a “skip-a-payment” option which can be used as a last resort because otherwise you will be increasing the amortization and will also likely increase the amount of overall interest you will be paying.
If you have to use either the longer amortization option or the skip-a-payment option then your mortgage payments may actually be too costly to begin with.
