In Canada’s heated housing market, there are a lot of people who are wanting to buy a home before they become ‘priced out’. There are a lot of people who buy a home that exceeds the recommended budget for their home and are basically house poor…they are spending more than 32% of their income on shelter. If you are looking for ahome to buy, don’t be a Gumby.
Remember Gumby? The green claymation character? He could stretch himself out. He could stretch himself really thin and still bounce back and resume his original shape. However, humans are not made like that and being stretched out on your monthly expenses is detrimental to your mental health and your financial health. Just like post-pregnancy, we don’t go back to our original shape unlike Gumby (haha!).
home buying minimums
There are some home buying minimum numbers that should be met if you are to qualify to purchase a home. Although these are minimums, I think it’s best to exceed them as much as you can.
According to Get Smarter about Money the recommended down payment is at least 20%. If your down payment is less than 20% you will have to pay additional CMHC (Canadian Mortgage and Housing Corporation) insurance because it is considered a high ratio mortgage. The absolute minimum is 5% (unfortunately! In my opinion, the bank owning 95% of your home does not mean you own a home!) up to $500,000. After $500,000, you will have to pay 10% of the balance in excess of $500,000.
For 2018, the Office of the Superintendent of Financial Institutions (OSFI) set out new mortgage rules, and forces lenders (aka the big banks) to make sure the mortgage applicant passes a stress rest before approving the mortgage.
The stress test is as follows (and the option that has the higher rate will be used for the calculations):
- 2 percentage points higher than the lender’s highest rate
- The potential mortgage will have to be calculated with the five year average posted rate (which is 5.14% as of writing per Bank of Canada)
In addition to the above, borrowers cannot exceed a 44% Total Debt Ratio (TDS) (this means that all debt, including car loans, credit card loans, any loans). Potential borrowers will also be required to spend less than 32% of their income on total housing costs, including utilities, property taxes etc.
spend less than 32% on your monthly housing costs
I found an affordability widget on RateHub that allows you to calculate the affordability of your intended home purchase including upfront expenses and ongoing carrying costs. It is very detailed and you can even add in condo fees, cable, Internet, phone, home insurance (home insurance in Vancouver) etc. It even shows the amortization schedule and the land transfer tax for your province. Super detailed and I am impressed!
Although the max affordability is 32% of your gross income, I think if you don’t want to feel stretched you should aim for housing carrying cost spending that is much lower.
People want to see what they can ‘max qualify’ for but they don’t realize what their lifestyle might be like if they are maxed out. A house poor lifestyle is not fun. It means less balance. Even if the home costs so much of your salary, inflation WILL happen, things will get more expensive, like groceries, meanwhile salaries may not increase at the same pace.
This should definitely be kept in mind if you are getting a mortgage quote online, for example.
my experience
I bought a home with my ex a few years ago, and even though it was less than 32% of my ex and I’s gross income (well, until I went back to school and then it became much more than 32% for me) I felt stretched. There were property taxes, repairs, and the utilities. The heating bill was so much higher than estimated (it was around $300-500 for two months over winter). Even though we had a mortgage helper (tenants in the basement suite, not a laneway house), I felt pretty Gumby-ish.
I wasn’t being a very good Canadian personal finance ‘expert’.
It didn’t feel good knowing that we owed so much money (over $600,000) without being able to pay it off easily. Oftentimes, I would worry about what would happen if one of us lost our job and wasn’t able to make the monthly payments. During that time, my ex did lose his job… he was able to make his monthly payments until he found a new job after a few months, but it was worrisome indeed. I would also worry what would happen if one of us croaked, or was on disability. A lot of thoughts went through my head, and if I recall correctly, it was even a variable rate mortgage too! Worrying about the next rate increase usually happened on my behalf when waiting for the Bank of Canada announcement. I am indeed a worry-wart. In addition to blogging, worrying is a great hobby of mine.
We had mortgage insurance which was a mistake.
After that relationship went sour, thankfully that was the start of the market increase and we were able to sell for some profit. With that I used the money towards my next home for myself while I hoped to meet a compatible life partner. With the rest of the money from the home sale, I used it to invest. When looking for the next home, I was thinking of getting a duplex, but it would mean being overstretched again. I ended up with a small one bedroom apartment, the mortgage payments, maintenance fees, home insurance, and utilities were manageable by myself. Of course I got a fixed rate mortgage which definitely helped my sanity. And I was able to make extra payments monthly and lump sum on my mortgage too. It felt much better than the first time around.
Although I would have definitely gained more home equity now if I had gotten the duplex, I am happy that I didn’t opt for that option as I wouldn’t have been able to travel or go out for meals with my friends, and probably wouldn’t have been able to even enjoy life.
If you want to get into the market but still want to enjoy life, addy allows you to real estate crowdfund in Canada for as little as $1.
Readers, was there ever a time where you felt like Gumby and felt overstretched?
GYM is a 30 something millennial interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for blog updates, a free dividend yield spreadsheet, and the free Young Money Bootcamp eCourse.
GYM, This is really good advice. When I was looking to buy my first home in the early 1990’s, the real estate market was pretty hot. The conventional wisdom (I guess from main stream media) was stretch yourself and buy as much house as you can afford. I didn’t follow the advice and I’m glad I did not. I bought a humble little 1200 sq ft. “dumpish” ranch. Mrs. DD moved in after we got married and over the years we put a lot into into (50% of purchase price). When we sold last year after 20 years we were fortunate to get our purchase price, cost of improvements and closing costs out of the sale price. Net return on investment = zero. The best thing about it was that it was reasonably cheap to live there and as our incomes grew we just stayed put and saved/invested the excess rather than upsizing. Tom
@Tom- Thanks for sharing, wow you did put a lot of renovations into your home. Net ROI= zero still not bad since you lived there for net-zero meaning you basically lived rent free? The real estate market is so hot right now. Good for you and Mrs. DD not to inflate your lifestyle as your incomes grew. I bought 5-10 years ago and I know my income has not gone up 40% (which is what the housing market for apartments has done in the past 5 years)- very unsustainable.
GYM, I agree. Don’t stretch. When I bought my first house, that was a stretch. Then 8 months later, I got a car with a loan. I felt the stress for a couple of years. The house was refinanced twice to bring down the interest rate by 3%, and the monthly payment became more affordable. It was quite a lesson I learnt: living under my means.
@Helen- Hey you still did great and retired early! Maybe the debt makes some people work harder to get rid of it and then “FIRE” and maybe some people are comfortable with debt– I guess people can go both ways.
I thought 32% would include all housing related stuff like property tax, utilities, and repairs. The mortgage is just a piece of the housing cost. We’re spending under 32% of our income, but housing is still our biggest expense. Someday, we’ll move to a lower cost of living location. I think getting a one bedroom condo was a good move for you.
@Joe- Thanks Joe, under 32% for everything all-in is good! From what I recall, it’s 40% for everything shelter and debt related but even then I think that’s quite a lot. Many people I know shelter costs are over 50% of their income.
Haha oh I know who gumby is! Weird, weird cartoon characters… maybe I’m too young. This is good advice, American banks recently moved that 36% to 42% recently and people are like “whaaaat are you doinggg.”
@Lily- Oh good to know, geez, are they trying to repeat 2008 again? Haha, Gumby was a weird cartoon character, especially when he looked surprised, which he often did.
Oh, I’ve felt like Gumby all right. In residency, I think I was paying close to 50% of my take-home income toward housing. Definitely felt stretched thin.
@SRGO- You were stretched thin financially and probably physically and mentally too from residency! Housing in SF is crazy, I think rental rates are higher than in Vancouver though but maybe home prices are similar.
This is what we are trying to prevent as we are searching to buy a home. As you seen in my monthly expense reports we try to spend in many of our categories at the minimum and it usually comes out to be around 10-15% that we spend from our monthly gross income. Once we have a mortgage, that will jump and we are hoping it will close to 30% in total expenses with the mortgage. But right now as we keep saving and building a bigger down payment, we are trying to get it to the mid 20% area. We will try not to be like Gumby but if we have to, we hope that it will be a small stretch.
Great advice GYM!!
@Kris- Good job! So good you continue to build that down payment. I was encouraged not to put as big of a down payment as I did (sort of like “why not? Borrowing is cheap”) but I’m glad I put more than 20% down. Mid 20% is very good, especially as there are spending surprises with homeownership that you don’t think about.
I’ve never shopped for a mortgage, but you bet I’ll be making sure that the amount is way less than we can actually afford. It’s too bad that mortgage companies encourage you to take more than necessary.
I’m also glad you were able to sell your first house for a profit. I’m sure that helped the complicated feelings of splitting property with an ex. I’m also happy that your new house is a lot more manageable, and the money saved went to other goals. The last thing I’d want is to be house poor!
Also love the Gumby reference!
@The Luxe Strategist- Glad you loved the Gumby reference, I credit that to my husband. He gives me a few blog ideas when we banter between diaper changes haha. House poor = no travel, which would just crush my heart and deflate my soul.
I feel that way now! Even with setting a nearly unreasonably low ceiling on how much we were willing to pay around here, our mortgage payments are more than I’m comfortable with. The mortgage is 22% of our income, before taxes and all related expenses, but I’d be a heck of a lot more happy with it being 15% all told. We’re working on that, of course.
@Revanche- 22% is not bad at all too! I would feel very comfortable with that. I think I am preaching to the converted here 😉 We in the PF community are anomalies that is for sure. I have a friend who has a million dollar mortgage and they do not make more than $170K annually combined.
Our mortgage is about 17% of our take-home pay. We got so lucky. I have friends that pay 40% or more of their income in rent/housing, and we are just in Nashville. Housing prices have gotten INSANE, while wages have stayed stagnant. I know if we ever decide to buy another house (which will have to happen, since we’re in an awful school district), we will be paying a lot more.
It is depressing to see how unattainable home ownership has gotten. This is great advice to keep people grounded. 🙂
@Steph- That’s awesome. It must feel good to not feel Gumby-fied! Right now on parental leave, my mortgage is making me feel Gumby-ish but it’s not that bad as I have savings to cover my low income right now. That is exactly what is happening in Vancouver- wages staying stagnant while housing prices are increasing. If you move to another home, you will sell high though too right? Housing has gotten very unattainable here. What do they say are the reasons for increased housing prices for Nashville? For Vancouver, they are trying to tighten the lending but it has gotten out of hand. There is a lot of foreign money and corruption going down here (even though the media says there isn’t). People are buying $600K homes with no subjects (e.g. no home inspection and no subjects to financing needed (yeah, crazy right!)).
Interesting point there! I have some coworkers going to sell their homes in high demand areas, and of course they’re going to make bank on the sale. BUT, every other house is going up and up in price, and rent is insane. So, even though we’d all be selling high, we’d have to buy high. Does that make sense?
And everyone is like move to a cheaper area here, but we’re getting to the point where there is no affordable places. ?
@Steph- Yeah, totally get it. The only option is to downgrade (e.g. move from a house to a townhouse, or apartment, or move out of the HCOL).
Good advice GYM, It must almost seem unattainable for home ownership if you are just starting out, especially in the pricier city’s.
When we purchased our house it was in the late 90s, my wife was home looking after the kids. With one income we where stretched, although it worked great for us its definitely good advice not to be a Gumby.
@Steve- Late 90’s was a good time to buy (though I’m sure it didn’t feel like it, people were probably talking about the housing crash at that time too). Victoria has gotten really crazy too! I can see a lot of people who grew up in Vancouver move to the Island. It’s such a nice place to be, more laid back, less rain (well down in Victoria anyway), and you have Island Farms, the best dairy!
I think there’s always been an unhealthy romance with homeownership as some magical panacea for all of life’s money ills. I’ve never felt stretched myself because as a first generation immigrant, I didn’t have the same love affair. A house was a just a house and while I love ours, I wouldn’t put ourselves in a precarious financial situation just to own it!
@Jim Wang- Thanks for visiting, Jim! What an honor, the original Bargaineering blogger! 🙂 “I think there’s always been an unhealthy romance with homeownership as some magical panacea for all of life’s money ills.” I love that! Everyone is drinking the homeownership kool-aid these days.
Hey GYM!
For starters – I’m super impressed with your mortgage affordability calculator in your blog…high five to your skills!
And I love the analogy to Gumby (yes – you create the best analogies!). I did love Gumby back in the day too! And was jealous of his stretching abilities and always snapping back into place.
I feel the most stretched for time lately…this past month and next couple of months at work are going to be a doozie for me! Crossing fingers I channel my inner Gumby and bounce back too!
We first bought our home in Dec 2008 – it was a great deal for new homeowners reaping the benefits of the crash! We couldn’t believe the difference was when we were shopping for our next home a couple years ago and visiting with banks, the loan office and realtors…I’m like, “banks be approving what?! No kids – do not take that out for your first home loans! Do not drink the kool-aid!”
@Mrs. DS- Oh I can’t take credit for that, it is the people at Rate Hub who are genius at creating stuff like that. All I did was copy and paste the HTML onto my blog post haha. Oh man, you bought in 2008! That’s fantastic, housing was so depressed then, I was even tempted to buy a condo in Hawaii! Yeah, you feel that when you are given X amount of dollars, you want to go ‘to the max’ I guess it’s human nature to ‘maximize’ but in this case, not a good idea as you say.
Excellent post. I love the Gumby reference 🙂
@Matthew Freeman- Thank you Matthew! 🙂
We actually did stretch ourself somewhat to buy our home, but sticking to the same home means that eight years later we are very comfortable. And roommates made quite a bit of difference 🙂 Glad we didn’t wait because we were able to buy in the bottom of the market.
@Angela- Roommates! You guys are totally achieving the house hacking dream! I have a friend who retired early and owned his home because they had roommates, he even had a star chart with them to document who did the dishes. It worked great and he has some interesting stories.
We stretched ourselves in the sense that we originally wanted to be able to afford the mortgage based off one of our incomes, but we were having a hard time finding anything that we liked honestly. So we increased our price some, but not like Gumby! Lol. However, the price was still much much lower than the bank would’ve approved us for.
@Ki- The bank approves people for a whole lotta money! Sounds like you struck a happy medium.
I have told my clients to buy a house that suits them and does not try to overstretch their budget. If you want a fancier house then I would suggest you wait and save up more for a better house.