What is the influence of the qualifying rate on Canadians?
It is a question most of us ask ourselves or our lenders, but what is a qualifying rate? A qualifying rate is the interest rate a borrower must qualify for if they apply for a variable or fixed rate mortgage with terms less than 5 years. Talk to private lenders Ontario if you wanted to calculate your mortgage. A stress test might be needed depending on the lender.
According to Dr. Sherry Cooper, “Qualifying rates are laid down by regulators. Regulators have said that the qualifying rate must be 5.25% or 200 basis points above your contract mortgage rate.”
The minimum qualifying rate is based on either benchmark of 5.25% or the rate offered by your lender plus 2%, whichever is higher.
For instance, if your lender offers you a 2% interest rate, you’ll have to use 5.25% for your stress test. Or if your lender provides you with a 4% interest rate, you’ll use 6% for the stress test.
Before you get approval for your loan, the bank or lender will conduct a stress test. A stress test determines if you’ll still be able to pay if the interest rate rises. There’s always a risk of interest rates increasing before you renew for a new term. A stress test is important because it will prove that you can afford the interest rate even if it rises in the future.
To check your creditworthiness, lenders will take a look at many things. Your down payment, the mortgage amount, current interest rates, mortgage amortization period, household income, and any outstanding debts.
They do this to do two crucial calculations.
1. Gross Debt Service (GDS) ratio
•The percentage of your income — before deduction that you will use to pay for things like the mortgage, property taxes, and utilities.
2. Total Debt Service (TDS) ratio
- Any debt that you are carrying. Like credit cards and loans.
After they are done with these calculations, they will be able to determine if you qualify for a loan or how much you can loan. Mortgage lenders Ontario will determine it.
If you have a high GDS and TDS ratio, you may not disqualify from getting approved for a mortgage. However, you should reconsider what you can afford. On the other hand, if you have a low GDS and TDS ratio, you should qualify for your mortgage and could afford a more expensive property and/or have a cash flow to support your lifestyle.
How to improve your stress test result?
1. Save up to increase your down payment.
The monthly payment will be lower when you give a higher down payment. Also, it will give you a lower TDS and GDS ratio.
2. Pay off as much debt as you can.
Before applying for your mortgage, make sure to pay off debts. Again, this will help you lower your GDS and TDS ratios. It could give you a lower interest rate because it will improve your credit score.
3. Get someone to co-sign your mortgage.
Having a cosigner with someone with a good credit score, you should consider getting one. Not only will it improve your credit score, but you also can be guaranteed a loan. The only downside is your cosigner is also a co-owner of the house.
Getting the stress test is essential for both the lender and you. If you pass the stress test, the lender will have an assurance that you can pay your mortgage despite the continuous interest rate rise. It benefits you the same way as it is to the lender. You can be at ease that you can still pay for your mortgage regardless of the high and low-interest rates.
You must know beforehand that you can afford your mortgage now and in the future. A mortgage has an extended amortization period and is a long commitment. Not being able to pay for your mortgage will damage your credit score and cost you your entire home.
The qualifying rate impacts Canadians in terms of the mortgage. It affects them when the interest rate rises, and they cannot pay their debt with the interest hike. That is why it is essential to be ready beforehand if you can still afford your mortgage even in the future.
Private Mortgage Canada is an option to go to when you want to inquire about or loan for your mortgage. They help you with all the processes and stress tests needed. Private mortgages are loans that are offered to individuals who do not qualify for the financial institution. There is a higher chance that you qualify for a loan when you apply for a private mortgage.