Why You Need to Stress Test Your Mortgage Now

Much like hunkering down for a coming typhoon, stress testing your mortgage can help ensure your finances don't get swept away should interest rates continue to rise.

Whether you are a first home buyer or a seasoned property investor, your capacity to keep up with your repayments is essential to stay on top of your mortgage. However, coming from the less than 2.5% one year fixed rates property owners saw last year, we are now seeing rates climbing up over 5%. If this trend continues, it's entirely possible to see one year fixed rates climb up to 6.0% come next year.

While the rising interest rates can be quite stressful for both aspiring and current property owners, there are certain steps you can take to make sure you stay in control of your mortgage.

What is a Mortgage Stress Test?

One of the key requirements of a successful mortgage application is the borrower's capacity to consistently meet the required monthly payments over the term of the loan. This is more commonly known as the borrower's serviceability.

To be on the safe side, mortgage lenders perform a mortgage stress test by using interest rates that are typically higher than the ones they publicly advertise. While each lender uses their own set of rates when performing a mortgage stress test, all lenders use rates higher than any current mortgage rate forecasts.

For Upcoming Mortgage Applicants

Banks are starting to increase the mortgage rates at which applicants are "stress tested". This is a decision typically made after a bank considers a variety of factors, such as potential housing market economic conditions, the current home loan rate environment, and ongoing interest rate trends. As a point of reference, this rate is as high as 8.15% at one lender.

These higher interest rate requirements can affect a borrower in different ways:

• A borrower that was pre-approved for $800,000 previously could now have his or her borrowing capacity reduced to $760,000
• A borrower that had their monthly expenses calculated at $3,000 previously may potentially have that increased to $4,000

While each bank has it's own way of assessing the borrowing capacity of an applicant, it's likely that we will see a decrease in the amount of applicants able to purchase property. This, in turn, can mean a potential decrease in house prices.

For Current Property Owners

When it comes to current property owners, it is essential that you perform a mortgage stress test as early as possible - doubly so if your current fixed rate is expiring soon. With interest rates going the way they are, it's likely that the interest rates you'd be able to fix for in the coming months will be much higher than before. This will likely lead to higher mortgage payments, making budgeting for you and your family much more difficult.

While adjusting to higher mortgage payments can be difficult, there are two key ways you can ease your finances towards a stricter budget:

• Allocate more of your monthly budget towards potentially higher mortgage repayments by reducing non-essential spending
• Preemptively save up for a "repayment fund" now, which you can use to top up your mortgage repayments should they increase in the future

Regardless of what method you choose, what's important is that you prepare for a potential increase in your monthly repayments as soon as possible. This way, you and your family won't be caught unawares when you eventually have to fix for a higher interest rate.

Our Team is Here to Help

Increasing interest rates can be a very stressful time for property owners. If you need a helping hand when it comes to sorting out your finances or working with a tighter budget, we would be more than happy to help.