No question about it, mortgages are expensive. Pricey real estate markets like Toronto, Durham or Oakville require big incomes and stable salaries. Starting a new job, a pandemic panic or self-employment can throw a wrench in your home buying plans.
Toronto Home Prices Going Up
Average home prices in Toronto have gone up four times faster than incomes in the past nine years. Even rents are uncomfortably pricey. Finding a reasonable place to live is getting harder.
Three Reasons Toronto is So Expensive
Toronto is Canada’s most expensive big city for at least three reasons:
- Not enough new homes are being built.
- The population just keeps growing – 77,000 newcomers in 2019 alone.
- Incomes are stale.
Who Suffers When Housing Prices Go Up
Research shows immigrants, young people and racialized populations are most likely to suffer when housing prices go up. Low-wage earners are locked out of home ownership at the very time that buying a home could give them stability and help keep their living expenses in hand.
Saving a Downpayment Takes 21 Years
Unbelievably, home buyers have to work full-time for 21 years to save a 20% downpayment for a Toronto area home. No wonder so many are turning to 5% down, low-ratio mortgages from CMHC and Genworth Canada.
Can You Afford a Mortgage?
Affording a mortgage is so stressful, in fact, that many Ontario families (those with the lowest down payments and least income) have turned to renting. Who can blame them? Canada’s mortgage stress test requires even borrowers with 20% down to prove they can afford their mortgage if interest rates go up. CMHC recently announced it will prohibit mortgage applicants from borrowing down payments, require them to have less debt and insist on higher credit scores (680 instead of 600).
Getting a Mortgage Together
Gino and Adele financed their side-by-side, bungalow-style duplex by pooling their income and down payment with her parents, his brother Ricky and Ricky’s girlfriend Susie. Adele’s parents pitched in $88,900 towards the down payment on the $889,000 five-bedroom Mississauga home. They took the single bedroom, walk-out basement suite, just the right size for a couple in their early 80s with one arthritic knee and a walker between them. Gino and Adele moved in above the couple. That left Ricky and Susie with the upstairs suite next door. They could use the basement suite as Ricky’s business office and write it off on their taxes.
Combining Income to Buy More House
The seniors’ combined retirement pensions, Old Age Security and Guaranteed Income Supplement gave Adele’s parents an annual income of $42,354. Gino was just starting out as an HVAC service technician after leaving a fast food job and Adele subbed as an elementary school teacher, when she could get work. Their income was $57,724 annually. Ricky was self-employed, detailing cars with a buddy at an auto shop they rented. Susie had waitressing gigs that brought in $14 an hour plus tips. They figured their total income at around $61,720.
How Much Mortgage Can You Afford?
Blending their incomes gave the family the buying power they needed. With 10% down, their monthly mortgage payments were $4,823 over five years, at a fixed interest rate of 4.84%. It was the best rate they could get with no previous mortgage history and a gross debt service ratio of 41%, just under CMHC’s cutoff of 42%. (Gross debt is how much you owe in total, including a mortgage, after income,) The mortgage included $32,400 for CMHC mortgage insurance, which protected the federal agency in case the family defaulted. Property taxes were another $373.81 monthly.
First-Time Home Buyer Plans
Fortunately, as first-time buyers, Gino, Adele, Ricky and Susie could get some relief.
- Ottawa allows RRSP owners to remove $35,000 tax-free under its Home Buyers’ Plan for a downpayment. Buyers have up to 15 years to repay it. Gino and Adele could have used that to increase the family’s downpayment to 13%.
- Had they wanted it, the federal First-Time Home Buyer Incentive Program gives borrowers a loan to increase their downpayment, lowering their mortgage payments and reducing interest costs. The loan adds 5% to the amount available for resale homes or up to 10% for new builds. They declined, knowing CMHC claims a share of any increases in a home’s equity when it’s sold. In Mississauga’s competitive market, they were worried their home’s price might soar.
- The $5,000 federal, non-refundable First-Time Home Buyers Tax Credit offers up to $750 in federal tax relief. Some second-home buyers and family members with a disability may also qualify for a tax credit. They’d look into that one.
Land Tax Rebates for First Homes
Besides tax relief and downpayment assistance, first-time home buyers in Ontario get rebates on land transfer taxes. Toronto gives Canadian citizens and permanent residents a full refund (up to $4,475) for municipal land transfer taxes for new builds or resale homes. The family qualified for the Ontario rebate, but not the Toronto refund.
A Happy Ending
All in all, they were one happy family, with all the space they needed and a single mortgage they could afford. What more could a home buyer ask for?
Find a Flat Fee Ontario Real Estate Lawyer
An Axess Law Ontario real estate lawyer can help you finalize your new home purchase. Licensed real estate lawyers are available 7 days a week, day or evening, by video call. Dial toll free to 1-877-552-9377 or 647-479-0118 in Toronto or use our online booking form for an appointment. In person meetings can be arranged at our Toronto, Scarborough, Vaughan, Etobicoke, Ottawa, Mississauga Winston Churchill or Mississauga Heartland law offices.
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