There are many things to consider when choosing between a fixed or variable rate mortgage. As of recently, you can add the mortgage amount you qualify for to that list.   

This is something that is relatively new.

For the past several years, your choice of mortgage product would not have an impact on your maximum qualified amount. However, the game has now changed with fixed rates doubling since late summer 2021. 

So the question is:

Will you qualify for more if you take the variable rate option?

Or will the fixed rate choice land you a higher mortgage amount?  

There can be a respectable difference between the two options.

It comes down the qualifying rate that we need to use for each option. This is more commonly referred to as the Mortgage Stress Test.

 

What Is The Mortgage Stress Test And How Does It Work?

As of November 30, 2016, the government mandated that all mortgage qualifications require passing a stress test. This means that you must qualify based on a much higher rate than the rate your payments are based on to ensure future affordability in a rising rate environment.

The qualifying rate (stress test) is the higher of the benchmark rate (currently 5.25%) or 2.00% above the contract rate (the rate your initial payments are based on).

For example, let’s say you have the choice between a 5 year fixed rate at 4.19% or a 5 year variable at prime -0.70% (currently 2.50%).

 

Stress Test With The Fixed Rate

With the fixed rate option, the qualifying (stress test) rate used will be 6.19%, as this is 2.00% above the rate your payments are based on. 

Contract rate of 4.19% +2.00% = 6.19%. 

As this is higher than the current benchmark rate of 5.25%, it’s the 6.19% that will be used for qualification.

 

Stress Test With The Variable Rate

With the variable rate, the qualifying rate used will be 5.25%.

Contract rate of 2.50% + 2.00% = 4.50%. 

As 5.25% is the higher number, this is what gets used to determine your maximum qualified amount.

 

How The Stress Test Impacts Your Maximum Mortgage Amount

Let’s now take a look to see how much of an impact this has on how much you qualify for. We will be basing this on a household income of $150,000, property taxes of $5,000, no debt or condo fees, and a down payment of 20%.

 

Fixed Qualifying rate: 6.19%:

Maximum purchase price:  $897,500

20% down payment: $179,500

Maximum mortgage: $718,000

 

Variable Qualifying rate 5.25%:

Maximum purchase price: $992,500

20% down payment: $198,500

Maximum mortgage: $794,000

 

You will qualify for another $76,000 simply by choosing a variable rate mortgage in this example.

 

Conclusion

If you are looking to maximize the amount you qualify for, then the variable rate option will be your best choice. It could mean the difference between getting into the home you truly love vs. a home that you think is just ‘adequate’.

There may be other ways to bring up the maximum you qualify for which I’ll be discussing in a future blog.  For now, feel free to reach out to me or any member of my team and we’d be happy to review your situation in detail and discuss your options with you.