In this video, we’re going to see what it takes to afford a house in Toronto and the GTA. And what kind of income and down payment you’ll need to make it happen.
The number one question I get from clients is “how much house can I afford to buy?”
I recognize that buying a house can be quite a challenge, especially in Toronto and the GTA, because of skyrocketing house prices, climbing interest rates, and tougher mortgage rules.
The Problem With Media Reports on House Affordability in Toronto
I know, there’s a lot of videos and news articles on the subject. But the problem with most of them, if not all, is that they only tell you what you need given the average price of all houses in Toronto. This is not very useful for you, or realistic, as it combines all types of homes into the average. What if you’re only looking for a 5-bedroom detached home, or 2-bedroom condo? So, to help you get a better idea, I’m going break it down into the 4 main home types: that is, detached, semi-detached, townhouse, and condo apartment. For each type, given a minimum down payment, we’ll find out how much household income you need to afford it. And later on, I’m going to show you how to find your own affordability, based on your unique financial situation. So please stick around for that.
January 2023 Data From TRREB
To start, let’s head over to the Toronto Regional Real Estate Board website. We want to get the most current data for house prices. I suggest you do the same when you’re ready buy your next home. If you want the edge in negotiating the best price, knowledge is power! It pays to do a little bit of research.
Go to the Market Watch page, and you’ll find the latest report. I have here the report for January, 2023. There’s a wealth of information here. But we only need what’s on page 1. “Sales and average price by major home type.”
It breaks down the average by home type, and by area code. As you can see, average prices in the 905 area are slightly lower than the 416. And this makes sense. Houses tend to cost less the further away from the downtown core.
To simplify things, let’s take the averages from the total column, which blends the 416 and 905 areas. It should still give us a good approximation. So, the average prices are:
For detached, about $1.34 million. Semi-detached, just over a million. Townhouse, about $888 thousand. And condo apartments, about $688 thousand.
Banks Ask These Two Basic Questions To Qualify Your House Affordability
So, what do you need to afford any of these types of homes? More specifically, what is the minimum down payment and gross household income required?
To find out, we need to know what the banks look for. And there’s a lot things they look for. But I’ve narrowed it down to just 2 main questions:
One, if they give you a mortgage, are you able to pay, every month, the mortgage, the cost of owning a home, and all your debt?
And number two, will you still be able to pay all these things if the interest rate goes up?
That’s pretty much what it boils down to. Yes, they use calculations like GDS/TDS, they scrutinize your credit report and job history, etc. etc. But to save time, I’ve done all the calculations for you. Later on, I’ll show you how you can do it for yourself.
Down Payment Rules For House Affordability in Toronto
One more thing, it’s important to understand the rules for the minimum down payment. It goes as follows:
If the home costs $500,000 or less, you’ll need a minimum down payment of 5%.
If the home costs more than $500,000, you’ll need a minimum of 5% down on the first $500,000 and 10% on the remainder.
And If the home costs $1,000,000 or more, you’ll need a minimum down payment of 20%.
And finally, we’re going to assume an interest rate of 5%, which is about what you’d get as of the date of this recording. And also, we’ll assume no other debts.
Results of House Affordability in Toronto Based on House Type
Ready for the results?
As you can see in this table, for each house type in Toronto, I’ve indicated the average price, the minimum down payment, the annual minimum gross household income, and the resulting monthly mortgage payment at 5% interest.
I’m going to leave this chart here for discussion. And by the way, I’d love to get your feedback and thoughts on what you see here. Were you expecting to see these figures? What does this tell you about the greater Toronto market? Tell me what you think in the comments section below.
I want to point out a couple of really strange things that stick out for me. Perhaps you’ve already spotted them.
One, the difference between the minimum gross household income of a semi-detached and townhouse is only $6,000 a year.
Two, the monthly mortgage payment for a townhouse is higher than that of a semi-detached.
And yet, a semi-detached home in the GTA costs, on average, $132,000 more than a townhouse. So, what’s going on here?
Well, it’s because the entry point barrier is less for the townhouse. Remember we said that the minimum down payment for a home over $1 million is 20%. For under a million, it’s just between 5-10%. So, the mortgage on the semi-detached is about $816 thousand, while it’s about $823 thousand for the townhouse.
Lower Entry Barrier To Afford A House In Toronto
This seems to defy logic, as it doesn’t necessarily make it more affordable for Torontonians. In fact, it becomes even more expensive when you add default mortgage insurance, but that’s a subject for another video. However, the good news is, the more you put down, the less income required.
The point is, this illustrates the importance of planning ahead and needing to understand what’s really going on with mortgage financing. Plus, there are ways to increase your down payment and reduce your costs, possibly making it a bit easier to afford a home.
Home Buyers Can Discover How They Can Afford A House In Toronto
To help you do this, and demystify the whole mortgage qualification process, I’ve created an online workshop, at no cost to my YouTube subscribers. This 1-hour comprehensive, yet easy-to-follow-along workshop consists of on-demand video lessons, so you can watch them at any time, at your convenience. Again, there’s absolutely no cost to you.
I’ll walk you through the whole process, step-by-step, showing you how to apply it to your own situation. Plus, I’m going to share with you a few tips that can help increase your affordability.
Let me put it this way. By the end of the workshop, you’ll have a very good idea of how much house you can afford to buy in Toronto, the GTA, or anywhere in Ontario. And you’ll know what needs to be done to make it happen.