Come to think of it, what is the only constant thing in the real estate industry? Change, yes change is among the common things you will encounter in this industry. With regards to change, the government will start implementing the new mortgage stress test rules on January, 1st next year. While many people are aware of this, only a few know what these changes are all about and who they are going to affect. Over the past few years, only the insured mortgage borrowers (generally the borrowers who have placed less than 20 percent of the property value as their down payment) have been undergoing a stress test on their finances.
As form Jan. 1, even the uninsured mortgage borrowers, those that have placed more than 20 percent of the property value as their down payment, will be subjected to this test. For instance, if you intend to buy a property worth $500,000 and have placed $100,000 or more as the down payment for a mortgage loan, you will still be required to take the test. Basically, this test is aimed at ascertaining whether the borrower is capable of repaying their loan if the interest rates increased in the future. So, who is this likely to affect?
Will the New Mortgage Stress Test Rules Affect You?
As you can see from above, these changes will affect anyone looking forward to buying a home using a mortgage loan any homeowner who would like to refinance his or her home. In this regard, all mortgage borrowers will be required to qualify for their respective loan amounts, based on this test. The borrower should be able to pay the loan if the rate increased by up to 2 percent of the current interest rate or by the five-year posted rate; whichever value is greater. As you can see, this will definitely impact in your buying power.
In most cases, the five-year mortgage posted rates are comparatively higher than the current contract rates. This is anticipation by the government that the loan rates may increase in the future; hence affect the ability of the borrowers to repay their mortgages. For instance, let us assume that your mortgage lender has given you pre-approval for a 3 percent rate on your mortgage rate; the new mortgage stress rules will require you to be able to repay the loan at an interest rate of 5 percent, even though the pre-approval rate is 3 percent.
If approved for such a mortgage, you will be repaying the loan on the 3 percent interest rate. However, an increase in the loan rates in the coming years will not affect your ability to repay the loan; since you have been proven to be able to repay the loan at an interest rate of up to 5 percent.
Assume that you qualified for a $300,000 mortgage loan that you are required to repay in a period of 25 years at an interest rate of 3 percent. In such a case, you will be required to pay $1,420 per month, at the current contract rate, for the 25-years loan period. For you to qualify for this loan, your finances will undergo the stress test to ascertain whether you are capable of repaying this loan at an increased interest rate, of up to 5 percent. In this regard, you must prove that you are capable of paying $1,745 per month for the 25 years, even though the current rate requires you pay just $1,420 a month.
As you can see, all the mortgage borrowers will be required to qualify for higher interest rates as from January, 1st, regardless of the much they are willing to pay as the down payment for their loans. Therefore, you need to factor these changes into your plan, if you wish to buy a home after the rules have been implemented. Since this move is bound to affect home seeker’s buying power, a considerable number of them are rushing to secure mortgages before these rules are enacted. You also need to bear in mind that the pre-approvals, currently in place, will not protect you from these changes when they come to effect.
For the past 10 years or so, there have been significant changes in the real estate industry almost every year. This is considered to be another major change that will affect your buying power as well as the ability to qualify for a mortgage loan. According to most of the local mortgage professionals, you should consider getting a mortgage before Dec 1, 2017, to steer clear of the effects of these changes.