Purchasing a property for the first time is one of the biggest decisions a person can make. The deed can be daunting as it requires a large capital investment and a long-term commitment. With this kind of pressure, judgements can often be clouded.
Conventional wisdom says to BUY: land is limited, mortgage rates are low, and interest rates aren’t moving significantly higher any time soon. In Toronto, there continues to be a push by millennials into downtown living in order to avoid the long commutes on increasingly more congested roads. Immigration and foreign investment continues to increase housing demand, pushing the prices of single-family homes potentially out of reach. As a result, homebuyers have become reactionary.
Experts have been cautioning Canadians for years about the potential risks that exist in the Toronto housing market. Whether a correction is on the horizon is unclear – speculation is not something we pride ourselves on. However, real estate is prone to market cycles and, like with any investment, our philosophy is to make calculated decisions and mitigate risk when possible.
Our suggestion: Consider the costs and stay mindful of your budget.
Most Canadian lenders use the Gross Debt Service Ratio (GDS) to determine how much debt you can reasonably afford. The generally accepted ratio is that no more than 32% of household pre-tax income should be spent on housing costs such as your mortgage, utilities, 50% of condo fees and property taxes. To put that into perspective, the average detached home in the GTA costs $950,043, which would require a household income of $165,000 to service. The average condo is worth $406,846 and would require an income of $75,000.
Just because a bank approves you for a certain amount, doesn’t mean you have to use it all.
The purpose of the GDS is to determine whether or not you will be able to repay what you borrow. In no condition does it consider your ability to balance debt repayment with retirement savings, future child costs, and spending on non-essentials such as life-style expenses or taking a vacation. These other expenses should be taken into consideration when planning your cash flow and budget. Also, leave some room for potential mortgage rate increases so that you can absorb the impact of such without severely effecting your lifestyle in the future.
Although the CMHC requires a minimum 5% down payment on homes under $500,000 and 10% on amounts over $500,000, having at least 20% down on your home avoids the cost of mortgage loan insurance and leaves you with a bit of a cushion for further liquidity if needed. In the event that something goes wrong – like a loss of job, unexpected repair or renovation – you will be able to use the liquidity in your home as an emergency measure.
Your home can be a lot of things, one of which is an important investment. When making an investment it is important to be prudent, do your homework and not be reactionary. Make sure that the debt you take on will allow you to sustain the reasonable lifestyle you wish to maintain as well as allow for any unplanned contingencies such as repairs, job interruptions or increasing rates. It is difficult not to get caught up in the current housing frenzy for fear of being left out, but best to leave your emotions at the door.
Cattelan Private Wealth Counsel.