October 12, 2022 SEP Dev

Why is my Affordability Going Down?

We often get repeat inquiries from clients whom we have spoken to in the past. For various reasons they weren’t ready to make their purchases at the time but were working towards setting themselves up to do so (i.e., down payment, credit, etc.).  Now that they are ready to pull the trigger, they find themselves not being able to qualify for the same mortgage they would have a year prior. What gives!?

The short answer is that interest rates have doubled from their all-time lows and the published qualifying rate is no longer used in the stress test. As a reminder, the stress test that needs to be used in qualifying for a mortgage is either the published “qualifying rate” or the contract rate + 200 bps (basis points), whichever is higher.

For a long time, the “contract rate” + 200 bps was less than the qualifying rate. Therefore, in most cases, the qualifying rate was used across the board to determine maximum mortgage affordability. At the time of writing this piece, the contract rates + 200bps have exceeded the qualifying rate. This means that the stress test has ultimately gone up, which ultimately puts downward pressure on one’s mortgage affordability.

For example, if you have an income of 100k and used the qualifying rate of 5.25%, you could manage a maximum mortgage of approximately $480,000. However, using a contract rate of 4.59% + 2% (= +200 bps), then the maximum mortgage affordability gets reduced to approximately $420,000.

The main reason for this shift in the stress test approach is that the contract rate has risen to exceed the qualifying rate. Fortunately, home prices have recently come down from their all-time highs and in some cases, are enough to offset any decrease in mortgage affordability.

Although this is the current state of qualifying for a mortgage, there are often strategies we can use to help nudge (increase) mortgage affordability in a favorable direction. If you would like to learn more about this topic or would like to assess your affordability, please give us a call today at (905) 455-5005.

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