TORONTO —With the sluggish economy and tightened lending rules, being priced out of the real estate market is a reality for many, particularly those in Toronto and Vancouver.
But whether your finances are limited or you simply don’t want to overextend yourself, there are other options.
Move to an affordable market
For home buyers willing to commute or relocate, affordability may be within their grasp.
Take Toronto, for example, where recent statistics show the median family income is $75,270 and the average home costs $762,975. Using these figures, prospective homebuyers wouldn’t be able to qualify for a mortgage.
“The maximum purchase price this median family’s income could support is $620,935, and they’d need to put six per cent down,” says Rob McLister, founder of RateSpy.com.
But affordability starts to come into the picture about an hour west of the city in the Hamilton-Burlington area where the average home is $507,131. A family earning $75,270 could qualify with a minimum down payment of $25,713. Assuming a typical five-year 2.5 per cent fixed-rate mortgage, monthly payments including mortgage insurance would be about $2,231 over a 25-year amortization.
Those willing to leave the Greater Toronto region altogether could see their mortgage costs slashed even further.
In Ottawa, where the average price for a home is $366,639, a family earning $75,270 could easily qualify for a mortgage with minimum down payment of $18,332. Monthly payments with a five-year 2.5 per cent fixed-rate would be about $1,614 over a 25-year amortization.
Keep in mind that additional differences in factors such as commuting costs and land transfer and property taxes would also have to be taken into consideration, McLister notes.
Co-buy a home
Buying a home with a friend or family member is an option 24 per cent of millennials are considering, according to a recent RBC survey.
By combining incomes, individuals can qualify for a larger mortgage and split the closing costs and down payments, says Alan Aronson, a sales representative for HomeLife/Realty One Ltd. in Toronto.
A single person would need to earn about $143,342 per year to qualify for the typical $800,000 home, Aronson said. But if two lower-earning individuals sign a co-buying arrangement and both contribute five per cent down payments toward a five-year three per cent fixed-rate mortgage, they would each have monthly payments including mortgage insurance of about $1,744 each over a 25-year amortization.
And in addition to splitting the $24,400 land transfer tax which would apply in Toronto, co-buyers would also split property taxes, not to mention utilities and insurance costs.
If that sounds appealing, Aronson says, be aware that if one individual starts defaulting on payments you risk losing the house to the bank or being forced to sell earlier than planned.
Relationships can also be volatile, he adds, “especially where money is concerned.”
His advice is to document rules for all the possible “What if?” scenarios in writing with a lawyer prior to a purchase. He says that can “save money and headaches if anything bad things happens down the road.”
In heated housing markets and in certain situations, renting can be a better financial decision, says Jason Heath of Objective Financial Partners, “if you ignore the practical and psychological benefits of home ownership.”
Heath describes a Vancouverite looking to upgrade from a starter condo to a typical detached home in the city valued at $1.5 million. After generating a 20 per cent down payment for $300,000 from the condo sale, mortgage payments would be $5,376 per month, assuming a 2.5 per cent interest rate and 25-year amortization.
However, for those unwilling or unable to commit to such a large mortgage, investing that $300,000 instead of using it for a down payment could pave the way for a secure retirement.
By avoiding the $28,000 B.C. land transfer tax and saving $1,500 in legal fees on closing, says Heath, that money could be worth $487,741 in 10 years assuming a four per cent after-tax rate of return.
He adds that rent on that $1.5-million home might only be $3,500 per month versus mortgage payments of $5,376 in the first five years and $6,674 for the next five years if rates rose to five per cent. Savings on property tax, home insurance and maintenance might add up to another $14,000 per year.
Heath says if you were to invest that extra cash flow from renting instead of owning at the same after-tax four per cent return, that could be worth another $522,001.
In such a scenario, you would have $1,009,742 in your investment account after 10 years.