Is There a Stress Test for Mortgage Renewals?
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In the face of financial strain caused by inflation and increased borrowing costs, it’s crucial to cover all your bases before making significant financial decisions. If you’re a homeowner, one such decision is your mortgage renewal.
If you’re part of the 2.2 million that will experience interest rate shock in the next few years, shopping around to ensure you get the best rate and terms available will likely be at the top of your to-do list. However, before you decide to renew with a new lender, it’s essential to understand the mortgage stress test and how it may affect your renewal.
Key Takeaways
- The stress test is required to assess risk and determine if you can afford your mortgage should interest rates increase during your term.
- Switching federally regulated lenders at renewal does not require requalification under the stress test.
- Mortgage requalification is required when switching your mortgage from a subprime to a prime lender.
Understanding the Mortgage Stress Test
The stress test is a federal government requirement for lenders to assess a borrower’s risk. It determines whether you could afford your mortgage payments if interest rates were to rise. The stress test means you must be able to qualify for your mortgage at either the higher of the contract mortgage rate +2% or 5.25%.
As contract mortgage rates are currently higher than 5.25%, you will be qualified at the contract rate of +2%. If you were to be offered a rate of 5.54%, your qualifying rate for the mortgage would be 7.54% (5.54% + 2%).
Understanding the Stress Test for Mortgage Renewals
You will not be required to pass the stress test if you renew with your current lender. You are also exempt if you have an insured or uninsured mortgage with a federally regulated lender and plan to straight switch (meaning your mortgage amount and amortization remain the same) to a new federally regulated lender at renewal.
However, you must undergo the stress test if you are renewing and plan to switch from a subprime to a prime lender. This is because the new lender needs to complete its due diligence as it assumes ownership of the risk for your mortgage.
When to Start Comparing Mortgage Rates
To ensure you have enough time to compare your options, start shopping for a better mortgage rate at least 4 months before your renewal. While your current lender may ask you to renew early, a renewal statement is typically issued only 21 business days in advance of your maturity date. Most lenders can hold a rate for up to 120 days, giving you ample time to explore your options.
Switching Mortgage Lenders: Is it Worth it?
You may want to renew your mortgage with a different lender for several reasons. One compelling reason is the potential for a lower interest rate, which can save you money while providing you the ability to shorten your amortization period if you decide to carry a higher payment.
Even if you find that the rates offered by other lenders are not significantly better, it’s still worth considering the features offered with their mortgage products. Assess whether their terms align better with your financial situation, payment frequency, or prepayment privileges.
Staying with Your Current Mortgage Lender
While switching lenders may have the potential for better rates and terms, sticking with your current lender may be the best option. Negotiating with your current lender could help you secure a better rate, especially if you have a multi-product banking relationship and like their mortgage terms. Rarely will your lender’s first offer be their best, so negotiating is key when you want to stay with your current lender and are looking for the best rates.
Benefits of Shopping Around for Mortgage Renewal
Shopping around for mortgage renewal offers several benefits:
- Potential Cost Savings: You may be able to save money over your mortgage term by securing a lower interest rate. Even a slight reduction in interest can result in significant savings.
- Shortened Amortization Period: A lower interest rate could free up your budget and allow you to make prepayments or change your payment frequency to an accelerated payment option. These benefits can help you pay off your mortgage faster, as more payments go toward the principal balance, saving you interest costs.
- Better Mortgage Features: Different lenders may offer mortgage products with more suitable features for your financial needs, such as flexible payment options or the ability to make additional payments.
- Opportunity to Reevaluate Your Financial Goals: The mortgage renewal process allows you to reassess your financial goals and make necessary adjustments. This can help you align any restrictions on your mortgage with your long-term plans.
Factors to Consider When Comparing Mortgage Rates
When comparing mortgage rates from different lenders, looking beyond the interest rate alone is important. Consider the following:
- Features and Benefits: Review the features and benefits of each mortgage product, including prepayment penalties, payment frequencies, and any additional fees.
- Customer Service: Evaluate the quality of customer service offered by each lender. Good communication and support can significantly affect the mortgage renewal process.
- Mortgage Features: Consider any additional features or benefits offered by different lenders, such as the ability to port your mortgage or access to a line of credit.
- Overall Cost: While the interest rate is important to most borrowers, it’s essential to consider the overall cost of the mortgage, including any fees or charges associated with the loan.
The Importance of Professional Guidance
Navigating the mortgage renewal process can be complex, especially if you will be subject to the mortgage stress test. Seeking professional guidance from a mortgage expert can help you find the best mortgage option for your needs. A knowledgeable expert can streamline the process by providing personalized advice and assistance in comparing rates and terms from different lenders, saving you time and money.
Frequently Asked Questions
Do I need to be stress tested when I renew my mortgage?
You do not need to be stress tested at renewal if you remain with your current lender or are switching from one federally regulated lender to another. If you have a mortgage with a subprime lender up for renewal and wish to switch to a prime lender, you must pass the stress test. If you are switching lenders and want to increase your mortgage amount or the amortization, this is considered a refinance, and you will be required to undergo the stress test.
How can I pass stress test requirements?
To pass the stress test requirements, you must qualify for your mortgage at 5.25% or the contract rate +2%, whichever is higher. When the lender assesses your ability to repay the mortgage at a higher rate, they will look at your debt service ratios. They will use two calculations called gross debt service (GDS) and total debt service (TDS) ratios to determine if they fall within the required range to approve you for the mortgage.
How can I avoid being stress tested?
The stress test is a federal government requirement and will apply to all federally regulated lenders. Alternative mortgage solutions like private lenders and non-federally regulated credit unions may allow you to qualify for a mortgage without the stress test; however, you’ll pay more interest on your mortgage.
Final Thoughts
If you’re up for renewal in the next few years, it’s vital to be proactive and understand how your mortgage may impact your renewal decision. Whether you decide to renew with your current lender or shop around, you must evaluate more than interest rates. Compare the terms and conditions, features, and benefits that may be important for your financial goals and circumstances, such as prepayment privileges and accelerated payment options.
Contact our mortgage professionals, who can help you secure the best mortgage rate and terms for your renewal.
