There has been a lot of talk about the new mortgage restrictions aka “mortgage stress tests”. But with all the coverage and information out there, what does this actually mean and how does it impact you?
Starting Jan. 1, 2018, if you’re applying for a new mortgage (e.g., buying a new home), re-advancing an amount on your mortgage (e.g., renovations), or switching your mortgage to another financial institution, you’ll be subject to a “stress test”. What this means is that your advisor will assess your finances and qualifications based on a higher interest rate than what they are today.
What many don’t know is this process is already in existence for people applying for mortgages with a down payment of less than 20% of the home purchase price or those with a term of less than five years. The new restrictions will now include those who have a larger down payment and longer term time.
Credit unions are not governed federally, and provincially are not legally bound to comply with these new restrictions. However, as a mindful and trusted community partner, many credits unions already have similar policies to ensure our member’s financial well-being is a long-term focus.
“Approving a member for a mortgage that they could not afford to repay over the long term, simply to satisfy a higher purchase price, does not agree with our values as a credit union, nor increase a person’s financial wellness” said Kris Wanner, Manager, Financial Services, Conexus Credit Union. “Also, it doesn’t promote community growth, all of which are key components to our cooperative.”
This “stress test” is being put into place to protect home owners from rising interest rates which may impact their overall finances. Lending rates have been at a historically low level for a number of years. Lately, we’ve seen a rise in interest rates which speaks to the why behind this stress test.
By factoring your ability to repay, and in turn how much they can spend on a home purchase, at a higher rate of interest provides you peace of mind knowing the greatest asset (and largest borrowing) you will ever have is something you can afford to repay. It also presents the opportunity for you and your advisor to discuss the difference between “What I qualify for” and “What I can afford”.
“Being aware of your finances and your plans will give you a better understanding of what you can afford and not feel stressed,” said Wanner. “It’s also important to think of all variables when looking at affordability. Many times people forget of other expenses, which can cause them financial stress in the future.”
When it comes time to applying for a mortgage or renewing your mortgage, take a broad look at your finances and your plans – look back at what’s changed and where you want to go. Don’t forget to also look at all other factors and expenses that may be associated with home ownership, such as:
- Property taxes;
- Condo fees;
- Utilities bills;
- Insurance; and
- Home security.
Other expenses such as loan and credit card payments, food, entertainment, etc. are also important to consider.
Homeownership all starts by understanding the money you have and what you spend. Once you have an understanding, you can then create a holistic plan that works for you. If you have any questions on what you just read or would like further information on mortgages, let us know by completing the Request Financial Advice form below.