How much more do you need to earn to purchase a home in Toronto? Is it easier now to buy than a year ago?

Although real estate prices may have declined in Toronto recently, one still needs to show a larger income now to make a purchase than a year ago. The main reason is the painful mortgage stress test.

Let’s look at the hypothetical example. We’ll take the Canadian Real Estate Association MLS Home Price Index, a 20% down payment with a 25-year amortization, and an average posted five-year fixed rate from the Big Five banks available to borrowers in January.

The average home price in Toronto went down by $178,600 from $1,257,500 a year ago and stopped at $1,078,900 last month. However, as the stress test requires borrowers to qualify at a rate of 5.25% or a contract rate plus 2% (the higher one is chosen), and an average rate now is 5.37%, buyers today are forced to qualify at 7.37%. In other words, they need to earn $207,000, which is $7,620 more than the $199,380 required a year ago.

Surprisingly, Toronto is much closer to the neutral point than other cities, for instance, Victoria, where housing prices fell by only $11,800, and the income necessary for making a purchase went up by $25,500. Nevertheless, it’s certainly not more affordable.

Meanwhile, Hamilton turned out to be the only place where real estate has become more affordable.  The average home price here decreased from more than $1 million to about $800,000. Such a decline was enough to offset interest rate hikes.

Qualification aside, our calculation has shown that today you will almost definitely get a better rate than 5.37% from some big national mortgage lenders working with mortgage brokers. For example, our best 5 years fixed rate is around 4.69% as of today!  With that rate and lower than last year property values you will have a lower monthly payment, need less income to qualify and save a lot of money for the down payment. Moreover, at the end of 5-year term you will have a much lower mortgage amount left!