Home > NEWS > What You Need to Know About Mortgages and Stress Tests

What You Need to Know About Mortgages and Stress Tests

At Donna Mullen & Associates, we want to help you make the right choice when it comes to getting a mortgage, and to do that, we provide the clear, accurate information you need to make the best call. Education is key, and math never lies.

One subject that comes up a lot recently is THE Mortgage Stress Tests and whether they have served their purpose. In this article, we’ll provide an overview of what stress tests are, how they work, and how to protect yourself with rising rates.

What Are Stress Tests?

In the context of mortgages, stress tests refer to assessments of a borrower’s ability to pay their mortgage both now and in the future. Since no one has a crystal ball and rates could go up or may go down in the future, the tests require borrowers to show they can afford payments at their current rate, plus an additional 2% buffer. The purpose of mortgage stress tests is to reduce the risk to the financial system as a whole by preventing people from taking out loans they can’t afford and defaulting on them if rates continue to rise.

Impact of Stress Tests

The interest rates for mortgages are now the highest they’ve been in over a decade, BUT it is important to note historically speaking, rates are still low. It is a good time to assess whether stress tests are effectively reducing the risks involved in mortgage borrowing, especially if you are looking to be pre-approved. The first stress tests for insured mortgages were done in late 2016, and while some of them are now being renewed, these loans represent a minority of all mortgages.

Most current mortgages are non-insured, federally regulated mortgages, for which stress tests became a
requirement in 2018. Because the most common term for these mortgages is 5 years, we won’t start to
see renewals until 2023 at the earliest, which makes predicting the impact of stress testing tricky.

Recent Buyers are Vulnerable

Due to COVID-19, variable interest rates on mortgages fell to as low as 1.3% from 2020 to early 2022,
and many borrowers took advantage of these low rates. However, more recently, these rates have
started to climb again, which has left these borrowers vulnerable.

How to Protect Yourself

The fixed rates are still much higher and continue to rise. So locking in will not be better on the payment. What we suggest is to increase your payment to what the fixed rate payment would be TODAY. The same applies for variable rates. This pays down your principal faster, all while protecting your budget for renewal.

This would keep you ahead of payment increases. Most people do not realize that just because the fixed-rate payment does not change, it is not protecting where it will be when you come to renewal. The payments could double on renewal. So we suggest easing into the rising rates while always protecting yourself and getting the best for your hard-earned dollars.