Chloe has a step rate mortgage with payments of $1,354 for the first 2 years, $1,295 for the next 3 years, and $1,871 thereafter. What payment should be used to assess her ability to repay?

In determining the ability to repay, the highest payment amount in a step rate mortgage should be used. Chloe's mortgage has three different payment amounts over its term: $1,354 for the first two years, $1,295 for the next three years, and $1,871 thereafter.

The correct approach is to focus on the payment amount that will be due for the longest duration and represents the maximum financial obligation. In this case, the $1,871 payment is the highest and will last for the duration of the loan after the initial five years. Using this amount provides a more conservative estimate of Chloe's ability to repay, as it reflects the worst-case scenario for her payment obligations.

Practically, lenders assess a borrower's ability to repay based on their highest potential payment to ensure that if a borrower can manage that amount, they can likely manage lower payments as well. Thus, in evaluating Chloe’s capacity for repayment, the appropriate figure is the highest payment she will ultimately be required to make.